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Economic Currents

Keep up to date with the latest UHERO news.

Financing Watershed Conservation

In November 2011, Governor Abercrombie and State officials launched a watershed protection plan entitled, “The Rain Follows the Forest”. The initiative’s goal is to double the current level of watershed protection – approximately 10% of priority watershed areas throughout Hawai‘i are currently protected – over the next ten years at an estimated cost of $11 million per year. Restoration actions would include construction and maintenance of fencing, feral ungulate removal, invasive plant control, and reforestation of native species.

The projected annual cost of $11 million is a large step up from the $1.25 million that was allocated to the 11 watershed partnerships across the State in 2011. However, a study commissioned by the State Department of Land and Natural Resources (DLNR) and undertaken by OmniTrak Group, Inc. in October 2011 found that 78% of survey respondents from a sample of Hawai‘i residents were supportive of such an increase. The result seems to suggest that the public recognizes the need to protect the source of our freshwater and the benefits such actions would provide.

UHERO research was prominently featured in DLNR’s legistative initiative. The DLNR Fact Sheet  notes that one of the most measurable benefits of watershed protection is enhanced groundwater recharge, citing a 2004 UHERO study (Pitafi and Roumasset) showing that a mere 1% loss in recharge in the Ko‘olau Mountains could cost O‘ahu $42 million in present value. The report also cited another UHERO study (Roumasset et al.) that estimated that the total net present value of ecosystem services provided by the Ko‘olau forests is between $7.4 and $14 billion. When considering the fact that forests are also important for water quality, climate control, biodiversity, and cultural, aesthetic, recreational, and commercial values; the benefit-cost ratio of watershed conservation investment is extremely high -- especially compared to physical infrastructure projects being pursued by the State and local governments.

As of May 2012, the State Legislature has partially funded the watershed protection initiative with $2.5 million in Capital Improvement Projects (CIP) funds and $2.5 million in special funds. Governor Abercrombie’s office again acknowledged UHERO’s research in the announcement of the State watershed action plan, which calls for increased funding in future years. Bond financing watershed conservation through the CIP program is an important precedent. Like building roads and schools for the future, investing in natural capital such as our watersheds increases net present value by ensuring that valuable ecosystem services are sustained in the long run.

In the future, DLNR will be seeking to put the initiative on more sustainable financial footing and plans to work with UHERO on examining alternative methods of finance. One possible item for future consideration is the extent to which watershed investment should be paid for by direct beneficiaries of the additional captured recharge. Much of the benefits generated would accrue to future water users, who will face higher water prices due to rising costs and increased water scarcity. A recent UHERO study (Roumasset and Wada) outlined a method for determining the benefits of watershed conservation by year and constructing a tax structure to pay off the requisite bond, based on the proportion of benefits received by each generation. One way to implement the tax is an appropriate adjustment of the rate schedule for water use.

--James Roumasset and Christopher Wada

Pitafi, B., J. Roumasset. 2004. Watershed Conservation and Efficient Groundwater Pricing. Prepared for the Agricultural and Applied Economics Association Annual meeting, Denver, CO, 2004. University of Hawai`i at Mānoa.

Roumasset, J., J.B. Kaiser, N. Krause, D. Mecham and J. Wooley. 1998. Environmental Valuation and the Hawaiian Economy. University of Hawai‘i Economic Research Organization.

Roumasset, J., C. Wada. 2010. A dynamic approach to the pricing and finance of interlinked ecosystem services: Watershed conservation and groundwater management. UHERO Working Paper Series #2010-12.


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Keeping the money at home!

Part of the justification for the pursuit of food and energy self-sufficiency in Hawaii is that it allegedly serves to “keep the money at home.”  It just sounds so good as an economic objective, as it has for over 200 years.

But consider that the idea of keeping the money at home is crude, modern day mercantilism (exports are good; imports are bad), an economic policy that was discredited over two centuries ago by Adam Smith (The Wealth of Nations) in favor of international specialization and voluntary exchange.

Consider that Hawaii just served most successfully as U.S. host to the 2011 summit of the Asia-Pacific Economic Cooperation (APEC) forum, a 21-member organization dedicated to advancing international trade and exchange in the Asia-Pacific region.

Consider that taken to its logical conclusion, “keeping the money at home,” if so desirable, should apply, not just to the State of Hawaii, but to individual islands (no cable from Lanai and Molokai to Oahu).  But why stop there? Why not individual communities (no shopping at Ala Moana for Kailua)?

Consider that we’ll all be poorer; the money we keep at home will have much less purchasing power because of higher prices of import substitutes.

Consider that state coffers will be diminished because of subsidies to local producers using energy technology not yet economically competitive without government support.

Consider that with severely constrained state budgets, subsidies to local producers come at significant cost to other Hawaii environmental priorities, like reduced funding for protection of Hawaii’s vulnerable watersheds from invasive species.

And consider that as pure transfers from taxpayers to producers, subsidies distort markets (as do taxes) and generate substantial loss of economic well-being to society, known appropriately as deadweight loss.  Every dollar paid out as a subsidy generates about 25 cents of additional loss that just whirlpools down the state drain. 

There are good reasons to patronize local food and energy markets: the freshness and uniqueness of local produce that can’t be matched by imports; the commercial viability of alternative energy technologies now ready for prime time without subsidy, e.g., geothermal. But as good as it may sound, “keeping the money at home” is not among those reasons, and is not economically sound as a policy objective for Hawaii.

--Lee H. Endress (Ronin Economist)

UHERO Researchers contribute to Sustainability Science

UHERO is proud to announce the forthcoming Sustainability Science for Watershed Landscapes edited by UHERO's own Dr. Jim Roumasset, Dr. Kimberly Burnett, and Dr. Arsenio Balisacan of the University of the Philippines Diliman. Sustainability science integrates traditional interdisciplinary environmental studies with policy science. In this volume authors go beyond the application of scientific knowledge to specific problems and develop new methods for dealing with dynamic, spatial, behavioral, and interactive complications of resource systems under pressure. The newly published volume is scheduled to be released in conjunction with the upcoming international workshop, "Sustainability Science for Food, Forests, and Floods: Integrating Climate Adaptation and Pro-Poor Resource Management" being held at the East West Center in Honolulu, Hawai'i May 27-28, 2010.

Reducing Greenhouse Gas Emissions in Hawaii

Dr. Denise Konan, to present at Renewable Energy and Island Sustainability (REIS) Seminar Series.

Hawaii has committed to reducing greenhouse gas (GHG) emissions to 1990 levels by 2020. This research presentation uses detailed data on Hawaii's energy infrastructure and economic activities to determine the carbon intensity of Hawaii industries. New results are also presented on the role that visitor expenditures play in Hawaii's GHG emission profile, relative to residential activities.


The Economics of Energy and Greenhouse Gas Emissions in Hawaii

Dr. Denise Konan, to speak at Hawaii Economic Association luncheon September 24, 2009.

The U.S. House of Representatives recently passed legislation that would put a price on carbon. The State of Hawaii has committed to sharp reductions in carbon emissions, and the Hawaii Clean Energy Initiative. Come hear the Director of UHERO's EGGS project explain what this transition to clean energy means for Hawaii's people, businesses, workers and visitors?

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