Understanding Environmental Economics | Marginal Babble Ep.34 with Professor Nicholas Hanley

Maxwell Dorey: environmental economic and it goes back about 100 years. Governments need to intervene to correct what the market does. Polluters don't pay there. social cost of pollution. The market tends to under supply. You can try and persuade people just to reduce their environmental impact. One thing that governments can do is they can put a price on pollution. So the very famous case of the Fox River in Wisconsin, they made the tradeable permit system so complicated that in the end, nobody traded. But that doesn't really say much about cost effectiveness. We have no clue as a regulator what it costs. There's an individual level behavioral economics component to a lot of these things. So I'm not going to tell anybody about it until I've done it. That is completely fair enough. How would you describe the goals of the environmental economics field? Well, I think they've been twofold. One has been to try and understand from an economic perspective why environmental problems emerge. So what are the causes of environmental problems? And the second one would be to better to improve on the design of policy. So one is understanding why does stuff happen? And the second one is how can we do something better about it? Sure. And I guess it's to some degree, it's trying to incorporate for the kind of negative externalities also, the negative outcomes that come from economic activity, things like pollution, sewage runoff or whatever it might be. Those things that have sort of a negative impact on the economy and society and so... trying to give them, I guess, either sort of a monetary or kind of value in an economic term, which traditionally hasn't maybe incorporated some of those things, right? Well, that's kind of mixing up a couple of things. So, firstly, so yeah, the oldest idea in environmental economics, and it goes back about a hundred years, is the idea of externalities. And that's still the story we tell about pollution. And we say, okay, this is one kind of market failure and it's why governments need to intervene to correct what the market does because polluters don't pay the social cost of pollution. But we also want to recognize that there's a kind of the symmetrical opposite of that, is there are ⁓ environmentally pro actions that generate public goods. And so the market doesn't provide enough of a reward for people to do that stuff. And so we, know, the market tends to under supply public goods of an environmental nature and over supply, ⁓ negative externalities like pollution. there's those two aspects. But the issue about whether we try and put a value on those impacts, that's, that's That's conceptually very different, I think. Okay. Interesting. So obviously I guess in that context, it's things like if you're in a city, you know, having the ability to have clean air has a, you know, a common resource that, you know, could even, that has like a benefit to public life. Or if you have, you know, spaces of sort of ecological diversity and stuff that people can sort of take, take advantage and use those areas, even if there isn't sort of economic output coming from them. Yeah. That's right. So on your second point, the farmer gets rewarded by the market for growing wheat, but he doesn't get rewarded by the market for how many blackbirds or wild flowers he's got on his land. Yeah. Or just maintaining the environment to some degree, right? The ability to sort of drive through the countryside stuff, think does have these kind of green open spaces to us provide a common good of sorts, I would say that obviously takes costs to maintain, right? Well, so if the farmer shows to ⁓ manage their land in a way that generates more wildlife, let's say, then they're definitely going to incur any cost in doing that because there's an opportunity cost, you know, the profit they forgo by farming in a more productive manner. So yeah, and the market is not going to reward them, not going to compensate them for those costs. So therefore we would imagine that on average, we're going to get an under supply of wildlife on private land, which is what we observe. A lot of the biodiversity crisis globally is taking place on privately owned land. that's exactly because markets don't reward landowners for protecting biodiversity. And then obviously to try and incorporate these policies, have to incorporate some government policy to some degree. And that requires types of design in various ways. could take a variety of forms depending on what you're trying to achieve, whether it be emissions or sort of ecological stuff. Before I guess we get into that, how exactly do we measure the impacts on the environment from economic activity, whether that be ecological or pollution or what have you? So that's not a question that economists are very well placed to answer. So if we look at the impacts on biodiversity, then you would never ask an economist to measure what's the impact of modern techniques of dairy production on biodiversity or what's the impact of deforestation on biodiversity. That's what ecologists do. So my ecological colleagues at Glasgow would think very dimly if I suggested that I could do a better job than them at measuring changes in biodiversity, for example. So I don't think it's economist's job to measure these impacts of economic activity. It's our job, I think, to figure out what to do about that. If we feel that society will be better off by reducing that impact, we can think, well, what's the best way of trying to achieve that reduction in impact? Is that through regulation or is that through ⁓ rewarding farmers for pro-environmental actions or is it for imposing environmental taxes? for example. Yeah, right. And obviously then that kind of brings you onto policy design in some way. Could you, guess, walk me through some of the different variations and types of policy that is kind of environmentally focused in this regard, like you say, either to try and reward positive behavior or de-incentivize some negative behavior potentially? Yeah, so let's start with the de-incentivizing negative behavior. So let's think about your example of air pollution. ⁓ We could say, well, you've basically got three broad sets of options you can regulate. So that could be in terms of the way in which stuff gets produced or how much gets produced or how much emissions gets produced. Economists tended to describe that approach as command and control, but that's a bit kind of pejorative. You can try and persuade people just to reduce their environmental impact. And that has some limited success. Or the third general class that we're kind of interested in is you could use economic incentives. And that's essentially putting back a missing price. So we talked about market failure and externalities arising from the fact that there is no price that the market charges for polluting. So One thing that governments can do is they can put a price on pollution and that could either be through a tax. So we could tax every ton of sulphur dioxide emissions coming out of the steelworks or it could be through having tradable pollution permits where the market in those permits results in a price being established. And you can actually show that under certain conditions, the permit price is exactly equal to the the pollution tax associated with a given target reduction ⁓ in pollution for a given industry. yeah, that's the economic incentives. Clearly that's what we're most interested in as economists. And since the early 1970s, I would say that's been one of the main focuses of what environmental economists do is to try and design better economic incentives to reduce negative externalities. But then on the, you know, the doing good things for the environment, well, you just have the, you know, the symmetrical alternative. You can either subsidize that. So you'll be a, you'll have heard of payment for ecosystem service schemes, which we have all over the world now. And essentially that's where you say to land managers, okay, the market isn't rewarding you for protecting water quality or ⁓ looking after native birds or reducing soil erosion. So we'll do it instead. We'll offer you a subsidy for every extra species of bird count on your land or for every 20 % reduction in fertilizer that you're willing to undertake. Or you could generate a system of tradable credits in biodiversity offsetting, for example, like we have in England now. That's another way that the landowner would get rewarded for doing a positive environmental action. So I'm going to convert this field from wheat into a wild flower meadows, which I'm going to have many more birds and insects and the market will reward me for that because I can earn a credit, which I can sell to a developer, let's say. So yeah, those are the two. So economic incentives, both on the negative side and the positive side. Yeah. I guess on, I guess there's other trading scheme side of that, because I think we saw it's about tradable credits and tradable permits there. To my understanding of how those work and the reason why they've been quite popular in terms of how the, in terms of creating them across Europe and the UK and stuff. And please correct me like where I'm obviously wrong and incorrect. But the idea is that, you know, having a just regulation policy over every single the industry is a little bit sort of heavy-handed. Some industries are naturally probably going to be more carbon intensive, for example, or, you know, deteriorating to the local environment than other ones. And the idea would be that with these schemes and these permits that you could trade is that if it's more economically viable for you to do so, then you can, ⁓ you know, if it's harder for you to get away from some of those policies, then you can just essentially pay other firms for their ability to not do so. But if it's easier for you to do that as an individual firm, then it creates an incentive for you to act in a very environmentally friendly manner, whatever way that is, and then sell those permits on essentially to get extra income. And it kind of allows this for, I guess, for want of a better word, better lubricated system that allows for in the aggregate, the actual system for affecting the environment. And if a positive, we'll say credits or permits a little bit more effectively? Would you say that's a fair assessment or am I missing something in that analysis? You're right. So the observation is that if you look at the marginal costs of reducing pollution and you think of that as a function, a marginal abatement cost curve, then that's very unlikely to be identical. If I even compared two firms in the same industry, they might have different age of technology or different locations or... be making slightly different products using slightly different inputs. And if I compare two firms in different industries who both generate the same pollutant, a steel making firm and a power station, then there's even more reason to suspect that their marginal abatement costs would be very different to each other. So what that means is If the regulator says, we need to reduce emissions of this pollutant by 50 % overall. ⁓ Telling every single firm they've got to reduce by 50 % is very inefficient because basically you're saying, I don't care what your marginal cost of pollution control are, you will have to cut by 50%. So if you do that and you think about it, what happens is that some firms end up on very high points of a cost curve and some firms end up much lower down. you can show mathematically, it's kind of trivial to do so, that doesn't minimize the cost to society of hitting your pollution control target. But if you have a market in the rights to emit and the government limits the supply of those credits, so it says there cannot be more than X thousand tons. that are used in any one year. So it's a regulated market, it's capped at a certain level of emissions. Those firms have got relatively high pollution costs. They'll be on the whole, the buyers of these credits and the firms with relatively low costs will be on the whole the sellers. And there'll be an equilibrium price established and each firm just chooses to essentially buy enough permits to equalize their marginal abatement costs with that equilibrium price. you know, ideally that then gives you the cost minimizing outcome. And we've known that to be possible since a really important paper in 1971 by two guys called Bommel and Oates. So yeah, that's under a tradable credit market for pollution for a bad thing. And that's its main advantage. It gives us flexibility and who does the emission reduction, but still guarantees us that the total amount of emission reduction is what we're aiming for. Things get more complicated if each firm has a different environmental impact per unit of emission. So that's not a problem for a carbon dioxide, but it would be a problem for say sulfur dioxide in the context of acid rain. But in principle, know, that's the basic idea. And that's interesting point, obviously, I guess to your point on that, does depend what. The thing is that you're trying to minimize it. So I guess your point about CO2, CO2 really in terms of emissions tends to be more of a sort of a global problem in the aggregate, right? It basically just goes up into the atmosphere and it kind of affects everyone relatively similarly, as opposed to something like your point, sulfur dioxide emissions, where it tends to be a lot more localized. And so things like acid rain and things like that. So I guess in some instances, particular firms doing particular activities could have an outweighed impact and potentially also the local environment. So guess these things have got to be taken into account, I would imagine. Ideally, yeah. But what we know is in the world's biggest sulfur dioxide trading system in the US, they eventually decided to ignore that ⁓ distinction in where firms were located ⁓ to a large degree because it just got too complicated. But it's still achieved a very big reduction in total emissions of SO2. And if you think about one of the biggest drivers of low river quality in England at the moment, which is non-point source pollution, then applying a tradable permit system to that is even more complicated because you don't actually observe emissions. All you observe is the intensity of land use. So that's way more complicated. Right. I suppose that's a... Another angle of this is that ultimately these schemes have to be enacted. It's not just theory and the more complicated you make them. I mean, for a variety of reasons, people trying to understand it, being able to administrate it effectively, cost associated of administrating it. You kind of do have to take that into account to some degree that actually these have to be policies that are practical in their ability to do something and not just have like theoretical ability to do something I would imagine. Absolutely. So the very famous case of the Fox River in Wisconsin, they made the tradable permit system so complicated that in the end, nobody traded. So it was a fantastic scheme in principle, but it had zero effect in terms of cost saving because they made it so complicated that nobody traded. What about, if you don't mind me asking, what about that specific example made it complicated? Was there a specific thing that Or was it just like an aggregate of things potentially that made it so complicated that people just didn't use it? So that, if I remember rightly, was all about ⁓ organic pollution and the objective was to improve dissolved oxygen levels in the river. And so for example, if you had a bunch of paper mills located at different points in the river, they would all have a different impact per unit of emission. on dissolved oxygen at any point in the river. So you couldn't allow firms to trade permits at a one-for-one rate because that doesn't control for where they're located. ⁓ I see. Because of the concentration, it becomes a factor there in terms of certain areas. Exactly. It's not just how much you add on average to pollution concentration through the river. It's also how much you add to pollution concentration at particular points in the river. So we did some modeling of a big estuary up here in Scotland, the fourth estuary. It turned out that if what you were interested in was improving the number of salmon that swam up the estuary, there was really only one stretch that you needed to focus your control actions on. But the kind of marginal impact of each source of organic pollution on that one stretch varied enormously. So if you're going to allow firms to trade permits, you have to somehow control for that. like in the exchange rate. ⁓ But my recollection is in the Fox River scheme, there were many, many, many more constraints put on trade than just this unequal exchange rate. But it's just a general illustration of the point that if you make these trading schemes too complicated, then the transactions costs go up and you lose many of the potential cost savings. So maybe a a simple scheme which more firms participate in gives you most of the bang for your buck. Yeah. Cost effectiveness obviously comes a lot into this, if it's subsidies, I guess, in terms of, you know, if funding that with tax revenues essentially. And so you do need to get your best bang for your buck in that regard as well in terms of policy design. Has the creation and initiation of some of these schemes, whether they be sort of tradable schemes or sort of other taxes potentially as well? Have they had a positive impact on oversimplifying just highly regulating a sector in your view when you've looked at various economies in different instances? Yeah, for sure. think ⁓ most environmental economists would agree that if you look at acid rain control in North America, the moves that the US took to introduce ⁓ sulfur trading, as some people call it, you know, on the whole were a pretty big success. You know, the benefits were much bigger than the costs and some of the cost savings of using tradable permits rather than regulation may have been overstated, but I think most people would agree that they were pretty substantial. So that would be one example. Another example close to home would be ⁓ the landfill tax in the UK. or the plastic bag tax when it was first introduced in Ireland. ⁓ People have written about, you know, both how much of an impact those two measures had and particularly for the plastic bags tax in Ireland, that it was actually a very popular measure, you know, because people had a simple way of substituting away from the polluting product, which was just reuse your shopping bags. ⁓ And again, everyone could literally see why, you know, we needed to consume fewer brand new plastic shopping bags when we did our shopping. So Frank Convery who's retired now wrote a great paper called the most popular tax in Europe question mark, which was essentially all about the introduction of that plastic bag tax in Ireland. So I think you definitely can point to examples of success. And I think many people would say the European Union submission is trading scheme. for CO2 emissions has been a pretty good success. You you could have made it better, but you what are you comparing it with? I guess it's always the big question. You know, not having that scheme or having a different scheme or just relying on regulation. So think there are some good examples of successes. Interesting. And how would you have... potentially improve that emissions trading scheme then? there any, from an economist point of view, is there anything obvious or sent to you a little bit nuanced that you think could have maybe increased the efficiency of that scheme while still sort of promoting economic activity? Well, I think as an economist, you've always got to be a bit realistic about, you know, we might earn our pay rises and earn our fame by making things ferociously complicated. but, ⁓ on the whole, that's not what's going to sell to policymakers. And we also have to admit that economic efficiency, which we're obsessed with, right? is only one of a very large number of criterion that, that politicians think about or civil servants think about when they're drawing up a policy measure. You know, they're also thinking about how, you know, Will it be perceived as being fair or how unsure is outcomes or how well does it fit with what we already do or who's lobbying for something different? Yeah. So, you know, we're, we're a bit naive often in our beliefs about, well, everyone should do this because we've shown mathematically this is clearly a good idea, but economic efficiency is not always the top of politicians or civil servants list. criteria, you only have to look at the common agricultural policy of the European Union to realize that's true. Yeah, that's certainly true, I would say. So we talked a bit about trading schemes there. Talk to me a little bit about carbon taxes, which is, I guess, is probably the other one that's kind of most common, at least from what I've seen in some policy design. Perhaps it's a little bit intuitive. I imagine, you know, just kind of slapping a tax on certain things. But talk to me a little bit about the ⁓ incorporation in use of carbon taxes or other types of taxes, depending on what the actual pollutant or degradation, negative externality is, how they're designed and their kind of relative effectiveness. So carbon taxes are in one sense simple because as you've already said, the kind of marginal impact of one extra ton of carbon emitted doesn't really depend on where it was emitted or by whom or how it was produced. We value one less ton of emissions in Australia exactly the same as we value one less ton of emissions in Norway because they essentially are just all contributing to global climate change. So that kind of makes it simpler. And if you do impose a carbon tax, of a very high levels. you know, let's say at the level of ⁓ the production of oil, for example, the refining of oil, then that does kind of bounce through every layer of production and every consumption decision, which has a bearing on final emissions. So in a sense, it's hard to escape the effects of a carbon tax if you levy it at the right point in the system. But what makes carbon tax taxation more tricky is you have to think about the fact that one more ton emitted today doesn't just have an impact today. It has an impact which goes through time for hundreds and hundreds of years. And so you've got to think about that when you're setting the tax. And what you've also got to think about is the fact that as the total stock of greenhouse gases in the atmosphere goes up, then the marginal impact of one more ton is also changing. And what that kind of implies is that carbon taxes should be rising over time, but it's pretty ferociously difficult to calculate exactly. by how much and in what way, but certainly they should be going up. So, I think carbon taxes is something that seems really simple, but actually because of this dynamic stock effect is actually slightly more complicated. ⁓ To give you a kind of the polar opposite, ⁓ again, coming back to the state of many English rivers and lakes, if we think that they're Poor ecological status is often caused by too high a nutrient level. And where are those nutrients coming from? Well, they're coming from fertilizers and from livestock. Okay. So why don't we just put a tax on that? Well, first of all, we don't observe the emissions. So, you know, we observe farmers growing wheat and we maybe observe how many tons of fertilizer they add, but we don't actually observe what's seeping out into rivers and lakes. Say, well, okay, that's fine. Let's just, let's just put the pollution tax on the fertilizer then, or let's put the pollution tax per head of cow. But then you say, well, hold on a minute, because actually we know there's big spatial variation in the impact of one more kilogram of fertilizer depending on where it's applied and even when it's applied. And also, how are going to monitor how much fertilizer farmers end up applying? How many farmers are there in Britain? It's quite a few. ⁓ So I think that gives you some other ideas of the complications in using pollution taxes. Yeah, I guess it comes back to that concentration in that issue because obviously to your point, particularly, I think my general understanding about kind of water pollution for oxygen levels and some other things as well, it's usually there's like a tipping point where you know, if X amount of something gets into the water, then it becomes very sort of degradating for bite, know, for fish and various other wildlife forces. And if you do have this kind of general tax sort of across the nation, ⁓ obviously there are bigger farms in some areas. There are different types of farms in different areas that may use less fertilizer or more fertilizer. There may be regions where there's more rivers where it can sort of soak up more of the runoff a little bit more than others compared to others. And so to kind of the point we made earlier, Anytime you have that instance, it's going to be very difficult to administer it in an appropriate manner as compared to ⁓ just a general carbon emissions tax, for example, because it kind of affects everywhere. every point on the globe, least relatively the same point, which I imagine is obviously again, just like a very, very difficult thing to be able to administer. Yeah. mean, think about applying a greenhouse gas emissions tax to livestock. That's a real challenge in how you would design that. If you think about the green gas gas emissions associated with the livestock industry, you'd have to say, I'm not sure exactly how is it just a sort of headage tax per head of cattle or per head of sheep? I'm not sure. ⁓ And of course, as economists, we tend to focus on just minimizing the cost per unit reduction in pollution. But you might say, well, actually politicians also worry about what that does to food prices or what that does to the difference between rural incomes and urban incomes, a whole bunch of other stuff that we tend to not think about very much. Yeah, certainly. And yeah, in terms of actual incentive design, because as we kind of mentioned when we're trying to design a lot of these policies, obviously incentives come into it and factor into it. How do you design policy in a way that draws upon the appropriate incentives? ⁓ And instead of accidentally creating perverse ones that may, you ⁓ when I think about, this isn't like an environmental economics example, but I remember not too long ago, we were talking about the economic history of India. And I remember that there was this During the British rise, they wanted to get rid of rattlesnakes for particular regions. And so what they did is they created a scheme where, ⁓ locals can basically kill rattlesnakes, take off their tails, give them into individuals and basically get a fee. And for a very short period of time, that worked. But as time went on, they were paying out more more money into it. And what they realized is people were actually just creating rattlesnake farms and then cutting them off and then selling them to the government. And so they actually weren't solving the problem. They're actually making the situation worse because there's suddenly these rattlesnakes farms and they're kind of everywhere. And I know that's not necessarily, I suppose it's a little bit of an ecological one, but like that's not a direct one into the environmental policy. But I think that's an example, at least for me, as like a clear example of, you've created a policy on paper that would work, but obviously in its implementation, it's kind of created these kind of perverse incentives that have not only mitigated the outcome you're trying to achieve, but essentially even made it worse. Now, it's very tricky. mean, most of our work at the moment is on the design of payment for ecosystem service schemes. So those are incentives to get land managers to change how they manage land in a way which reduces water pollution or improves some measure of biodiversity or, well, those are two good examples. But, and of course the British government has got land use change as one of the tools in its Climate change plan. know, planting more woodland, how'd you get farmers to agree to do that? And when you think about the intricacies of improving the design of these payment-free system service schemes, it's really super interesting, but also super challenging. Cause for example, you might say, well, it's very simple. We just increase the payment rate. That'll get more people to sign up. But that doesn't really say much about cost-effectiveness and it also doesn't mean you get the right farms to sign up. And it also doesn't mean that these farms might not have undertaken the action in any case, even if you hadn't paid them for it. So there's very low additionality. And it might well be that to achieve your environmental target, let's say restoring population of some bird species on farmland, what you actually need is connected, spatially connected. ⁓ areas of land that are put aside for conservation. So how do you incentivize that? Now, it turns out that's a really interesting question and there's lots of ⁓ papers now written on how to incentivize spatial coordination in these PS schemes. Or you might say, well, another really intriguing problem is the fact that the costs to each land manager of producing this conservation outcome are actually private information to that land manager. We have no clue as a regulator what it costs them. And so it's very likely that we're going to overpay for ⁓ the environmental goods that we're trying to buy here. Farmers are going to naturally enough rent seek and they'll on average receive payments that are higher than their opportunity costs. What do do about that? And, know, the people have been thinking about for quite a while now, whether you could use auctions, conservation auctions as a way of solving that problem. And, ⁓ places like Australia have really gone down that route to quite a big degree. Interesting. So what would, and to forgive me, cause I don't necessarily have that sort of knowledge on this, but how would auctions work? Is that this idea that, you know, you want to set up sort of biological and conservation regions, but you don't necessarily know what the costs are for specific regions. So then you put these regions up for auction and then people, local areas can sort of bid for them. Is that kind of, or are you completely not grasped at the concept at all? Yeah, you know, that's getting some of the way there. So you say, okay, let me give you an example for an experiment we just ran. So this is an experiment we ran with farmers in China. So you say, okay, we want the farmers to start using less chemical pesticides and switched using some kind of biological alternative for pest control because these chemical pesticides are having terrible effects on lots of measures of biodiversity and also on water quality. And we're prepared as the Chinese government to pay these farmers to do that. We'll offer them a payment for it. And if they take the payment, they sign a contract saying, yes, I'll switch from chemical pesticides to biological control. ⁓ But my problem as the government is I don't know what the costs are to these farmers. So if I run an auction, what I say to the farmers is, right, okay, well, we're going to offer up some contracts here. And if you win a contract, then essentially you'll get paid a certain amount of money and you will agree as part of that contract to switch from chemical. pesticides to biological control. And then farmers bid for the contracts. So each farmer obviously knows their own opportunity cost. And if you get the auction design right, then they're competing with other farmers to win a contract. So that incentivizes them to not shade their bids as people describe it. they're not bid too much over their opportunity costs for these contracts. And so you can show that actually doing that compared to just offering people a flat fee gives you the same conservation outcome for a much lower cost. And obviously also reveals something about the way in which opportunity costs vary across the population of farmers you're trying to incentivize. And in the UK, we've now run, I think, three of these conservation auctions. All in the context of water quality, all where the buyer is actually a private water company who's trying to persuade farmers to reduce or change how they manage their land to reduce essentially water pollution and therefore save the water company money and treatment costs. Yeah, that's interesting actually. Because like to your point about like having not having complete information about what the costs are to farmers. If you simply just put out a contract out there and allow people to bid for it, the farmers obviously know their own costs associated with it or have a good idea about it. And so they're not going to bid for something that's going to lose them money. And they probably won't even bid for something that's like net neutral just because of like time and stuff. And so you actually, you you'll find out, you can actually find out quite quickly what something is worth to a particular set of individuals in a particular area because depending on how much they're willing to bid for it, because they have to build in like sort of a level of profit margin on that. you can sort of build it out from there. And then obviously the farmers that don't want to, it's not going to be effective, cost effective for them in any circumstances, just don't have to bid for it. So it's actually quite an interesting system that I hadn't thought about that at all. So it's used a lot in Australia and in the US, but not at all in Europe, which kind of implies that the commission is not really interested in having more efficient design of agro environment schemes. But yeah, the big problem with auctions is low participation rates. So in some of the Australian examples, you've got no more than 15, that's one 5 % of farmers in a region choosing to participate. Because as you say, the transactions costs could be pretty high. You've got to figure out the rules of the auction, figure out what you should bid, decide whether it's worth your while, putting in a bid and all of that. there's a knowledge gap, there's a risk gap, it's the of the unknown, there's like an element to that as well. Yeah, so what people like Stuart Whitten have shown is, you know, one of the really important features of auctions, if you want to roll them out, is you need to have a lot of money spent on extension on farm advisors who go around and help farmers write these bids basically, just to lower the transactions cost. But it's a fun thing to research. So we've got quite a few papers that we've done recently on. how to improve the design of these auctions. Yeah, no, I think that's quite interesting. I'm curious as to why that Europe hadn't necessarily maybe taken them up. mean, particularly compared to like Australia and the States who are probably considered more pro-polluting sort of culturally potentially than Europe. I'm not too sure. It's interesting. I couldn't possibly comment, but you'd need to, you definitely need to ask someone in the commission and they probably wouldn't tell you. So probably. And in terms of some of this, we've talked about some of the incentives there. But I'm curious, and I know that you've kind of worked on some of these areas of how behavioral economics factors into this. Cause we've talked about some of those sort of macroeconomic implications of some of these things. But as we kind of just mentioned there, there's an individual level behavioral economics component to a lot of these things. And I think as a general example, I'll use the of the carbon emissions one as an example, that there almost seems like there is a bit of a prisoner's dilemma in that situation. in which, if you had full on cooperation, everyone sort of building into the system, everyone would be paying and they'd get a positive outcome from it. But therein lies a very high incentive for one country to deviate. Think of a multitude of countries that are maybe developing and want to need to pollute a bit more. And as a result, that kind of creates a chain reaction of countries potentially not wanting to do so because they end up in the worst outcome and you end up in this kind of... strange Nash, Pareto inefficient Nash equilibrium where basically we were all kind of worse off as a result of it. So I'm curious to how you think behavioral economics factors into some of these policies and policies that have been implemented across the globe and I guess what the successes are and the failures in some of that design implementation. I think there's two very distinct points here. So the first point that you made about international cooperation to achieve some kind of ⁓ reduction in a trans boundary or global pollution pollutant where you can show that, you know, the best possible outcome is everybody cooperates. And that's because marginal abatement costs vary across countries and so do marginal damage costs. So if you work out what's the optimal allocation of control responsibility, it's probably not. that everybody reduces by the same amount. we, so one really good example of this, which doesn't get talked about so much is marine plastic pollution. So we did a really nice project looking at the North Atlantic. So there's about 16 countries that are in our model around the North Atlantic. So on the North American side and on the European side, and you could say, well, Can you make some rough guesses as to first of all, ⁓ what would it cost each of these countries to reduce plastics pollution by one more ton? And then can you make some rough guesses about what would be the benefits to each of these countries from reducing pollution by one more ton? And then finally, which is the trickiest thing, can you actually model how plastics move around the North Atlantic? And so the answer to that last question is yes, you can. And we had a very smart guy at Plymouth Marine Lab who developed a nice model for us showing basically how if you dropped a Coke bottle off the coast of the UK, where would it go? Around the North Atlantic. And you do that same experiment with every country that borders the North Atlantic. You can basically calculate for each country, which has got a coastline on the North Sea in our case. ⁓ or the Atlantic Ocean for Ireland. ⁓ If you think about all the plastic waste that ends up in our waters, our coastal waters, how much of that actually ended up, how much of that was generated by us and how much of it was generated by other countries? And also for every ton that we put in, where does it go? And if you throw all that information together into big optimization model, you can show that actually the best possible outcome, one that maximizes the difference between benefits and costs is where every country agrees to cooperate, but they agree to reduce emissions by very different amounts. And that actually ends up imposing a cost on some countries. So you say, well, Who's going to sign up for that agreement? Certainly not the countries who seem to be incurring costs. So then you could say, well, let's kind of simulate an outcome where everybody at least is no worse off by agreeing or an outcome where everybody cuts by the same amount. And what you can show is that actually those outcomes are way worse than everyone agreeing to cooperate. And yet, as you've said, in this full corporation situation, ⁓ you know, almost at the limit, every country has got an incentive to free ride on the, on the actions of others. So there's, know, how'd you fix that problem? it's, something to do with side payments. ⁓ for example, although, know, we typically are really bad at doing that. your second point about behavioral interventions to kind of improve the efficiency of environmental policies. That's certainly something that. economists have been looking at more and more and And whether that's ⁓ motivating consumers to recycle more or ⁓ farmers to use water more efficiently ⁓ or consumers to think more about their use of energy, there's lots of insights from behavioral science that starting to be included in economic models. so, for example, we've looked at the effect of social norms on household recycling decisions or the effect of social norms on pesticide use by farmers. And you can certainly come up with a list of nudges to give them that generic description that in some contexts have a beneficial effect on the efficiency of policies. But I think it's very easy to overstate how big those beneficial effects are and also overstate how long they last for. Yeah. Particularly when you've got, you know, it's such a multifaceted equation and economy and that regards how much kind of nudge really sort of affects some countries incentives to do certain policies. I imagine it's quite difficult. Well, yeah, forget the word country, just think about individuals. So, you know, we've run experiments where we've sort of compared nudges with financial incentives for increasing pro environmental behaviors. I mean, one very crude summary would be financial incentives work much better than nudges and nudges can crowd out the financial incentive. And people like money. Well, on average, yes, I think that is true. And nudging of some kinds works in some cases, but it's very easy to get overexcited about it. Sure. No. Yeah. think Nudge Theory does have some, I've seen some good applications of it and some other bits and pieces, but to your point, think in terms of anything, if there's any sort of material impact you're going to have, it's very easy to overstate those impacts, you know, ultimately. Well, I think certain kinds of nudges like changing the default, you know, that definitely you can show as a sort of routinely big effect. Yeah. I think they did that on organ donors particularly, didn't they? I think that there's some. Well, I think the big example is ⁓ retirement savings whilst at work. ⁓ of course. Yeah. But other kinds of nudging that we've looked at in an environmental context seem to have pretty small effects. And obviously with the book, as think Coyne mentioned earlier, obviously the first edition of this was created back in 1997. And obviously there's been sort of a big sort of gap of time is of in between that. I'm curious in your view, since that you initially wrote the book or sort of contributed to the book ⁓ and today, and or even back for when you started off in the field of ⁓ environmental economics, over that time, what have you noticed have been the big shifts and changes in how economists and even essentially the public and with like public policy and stuff views environmental economics? So I still teach students environmental economics at the university. And obviously I talk a lot to policy people and other economists. But if I was trying to summarize how are things different today than they were in 1995, when I think we published that first edition, then number one, ⁓ firstly, a lot more people do environmental economics. So it used to be a very minority sport. but it's much more widely taught and is no longer a kind of a constraint to appearing just in field journals. find environmental economics papers in all the main journals these days, which is good. It's certainly become a lot more interdisciplinary. So we're writing stuff with psychologists. We've always worked with ecologists. We've worked with historians. It's become a lot more interdisciplinary. I think the behavioral science revolution has definitely had some effects. think the more recently, there's been a big, big growth in interest in trying to identify the causal effects of policies. And that's just not in obviously that's not just in environmental economics, but environmental economists have got right into that. ⁓ And I think the whole issue of the economics of sustainability, that's really changed a lot. And, you know, how we think about measuring sustainable development, the sustainability of development and what kind of policies might tip us more closely towards it has changed quite a bit. I think, and then, you know, finally, the extent to which we're able to estimate economic values for improvements in environmental quality or reducing pollution or the cost of losing some aspect of biodiversity. Our ability to make those kind of estimates has definitely improved a lot. And the extent to which government agencies take notice and make use of those numbers has changed a huge amount. mean, a lot of our work is funded by the Department of the Environment to actually inform the design of UK environmental policy. Certainly wasn't the case when I started. I suppose you are also just, because you of mentioned at the start of there, so many more policies have now been initiated. You probably have a lot more meat to kind of get into in terms of like research and assessment of some different policy, what works, what doesn't and real world examples. I guess I'd also imagine just as technology has improved over time. Cause like, as we kind of mentioned earlier on, like some of these schemes and models obviously so. complex, there's so many different factors, it's quite hard to model them out. But I imagine there's some improvement in technologies, probably allowed us to better assess and research some of these components as well, I would imagine. Yeah, I think also there's been a big change in mindset, particularly amongst younger researchers who are now more challenging of ⁓ the ways we've thought about problems in the past. And there's this whole crisis of confidence in and survey-based science that economists have had to think about, know, can you, you know, pre-publish your experimental designs? Can you put out a pre-analysis publication and a pre-publication analysis plan so you don't just try and, you know, hunt around your data to find the result that you were hoping to find, which is obviously a really bad idea. And the whole replication crisis, think, you know, is really had a big effect on how people think about, for example, publishing null results. So when I started that was like, well, why would you bother doing that? Whereas now it's, yeah, that's really important to publish a null result. Although some journals still push back, still push back against it. Yeah. I think that's really important. ⁓ Nick, this has been really, Interesting and really fascinating. I really appreciate you taking the time. guess just one question to kind of leave you off with. As the fields will develop and as the literature develops and increases over time and with the different changes and some of the policies that are being implemented across the globe, is there a piece of research that you would like to see potentially conducted in the future that would help maximize some of the gray areas or knowledge gaps that we potentially have in the field. Yeah. But if I figure out what it is, I'm not going to tell anybody about it until I've done it. That is completely fair enough. I get that. I don't want to give anyone else the heads up, I guess. No, thank you very much, This has been really great. I think I've learned a lot actually. And so, yeah, thank you very much for your time. I really appreciate you, Appreciate you taking the time. I'll get back to marketing masters this season. Great. Thanks. All right. See you, Max. Bye.