The New York Times on wednesday had a great article on Russia's newest export to the West --- carbon credits. There is clear evidence that there are gains to trade between Russia's electric utilities and Western nations.

After reading this article, I'm still puzzling over what are the unintended consequences from these anticipated transfers to Russia? Is this rewarding "bad behavior"? Is this similar to North Korea case where we seem to always be sending $ to its leader in return for his delaying his nuclear program?

Could this Russian case be an example of rewarding "bad behavior" without any dynamic incentives problems? In the case of the North Korean leader, once he recognizes that we pay blackmail he has an incentive to continue developing nuclear weapons to be paid again in the future. Is there an analogous situation here with Russia? I can't see it but I'm an old man!



December 28, 2005
In Russia, Pollution Is Good for Business
By ANDREW E. KRAMER

MOSCOW, Dec. 24 - By its own admission, Russia's electricity monopoly is the world's largest corporate producer of greenhouse gases, accounting - by itself - for nearly as much carbon dioxide as is emitted by Britain.

From smokestacks across Russia's 11 time zones, the company, Unified Energy Systems, spews out 2 percent of all human-generated carbon dioxide accumulating in the atmosphere.

What will the utility get for being the world's largest greenhouse gas polluter? It is hoping for $1 billion.

It is one of the paradoxes of the Kyoto Protocol on climate change that companies in Russia and other Eastern European countries, which are among the world's largest producers of greenhouse gases, are poised to earn hundreds of millions of dollars through trading their rights to release carbon dioxide into the air.

The Kyoto treaty, negotiated in 1997 and adopted by 36 industrial nations, established a mechanism aimed at finding the cheapest way to curb emissions of gases that contribute to global warming. The idea was that countries that produced more than their treaty-imposed limits could reach their goals by buying rights from producers in other countries where controlling output is easier and less expensive.

It is not clear how successful that approach will turn out to be. But because Russia's companies operate such outdated and inefficient equipment, they can easily and cheaply upgrade. As a result, the Kyoto process has already emerged as a potential source of earnings for the country's big energy and manufacturing companies, according to company executives and analysts. They have hired consultants, inventoried pollution sources to earn credits, and opened carbon-trading divisions.

Unified Energy and Gazprom, Russia's natural gas monopoly, which together release more than 50 percent of greenhouse gas emissions in Russia, both have such trading units.

"We're intensely interested in the carbon-trading market," Andrey V. Gorkov, the head of the carbon-trading division at Unified Energy, said earlier this month in Montreal, where he was attending the United Nations climate conference. Member countries formally approved emissions-trading rules at the meeting.

The protocol requires the 36 industrial nations - with varying targets - to reduce their emissions of greenhouse gases below their 1990 levels, in the five years from 2008 to 2012.

For the European Union, the target is to reduce emissions to 8 percent below 1990 levels. In an indication of how robust the demand for emissions credits may be, this year the European Union is 6 percent above its 1990 levels. The United States, which generates a fifth of greenhouse gases but has not joined the Kyoto Protocol, is 19 percent above its theoretical limits.

Russia, in contrast, suffered an economic collapse in the 1990's, and is 43 percent below its 1990 baseline in the Kyoto agreement. In fact, Russia does not expect to reach 1990's emissions levels until around 2020 - attesting to the severity of the economic setback from which it is still recovering.

At the same time, Russian industry is generally wasteful with energy, so that a few cheap upgrades go a long way to reducing emissions. Thus, with both outdated equipment and a surplus of carbon emissions, Russian companies have become attractive to European, Canadian and Japanese companies that need emissions credits.

The pace is increasing at Mr. Gorkov's cluttered office in Unified Energy headquarters, a drab concrete building on the outskirts of Moscow. Analysts give credit to the company's forward-looking chief executive, Anatoly B. Chubais, for recognizing the potential for profits under Kyoto. Mr. Chubais, a former deputy prime minister, had helped negotiate the pact while in government.

Mr. Gorkov's 16 employees at the division, which is called the Energy Carbon Fund, scan the Internet for companies or countries in need of carbon dioxide emissions credits. They also study their own company to identify areas where they can reduce pollution. The company signed its first deal in June, with the environmental protection agency of Denmark.

Denmark will pay an undisclosed sum for Unified Energy to replace coal-fired boilers at the Amurskaya power plant in Khabarovsk, near China in eastern Siberia, so that units will burn more efficient natural gas. It will also pay to upgrade an existing natural gas plant in the Orenburg region, in southern Russia near Kazakhstan, with a more efficient model.

The conversion to gas at the Amurskaya plant will cut carbon dioxide emissions by a million tons a year, according to Unified Energy. The upgrading of the natural gas generator at the Mednogorskaya power plant in Orenburg will save 210,000 tons.

Under the deal, the Danish government will receive 1.2 million carbon credits (one carbon credit being equal to reducing one ton of carbon dioxide), to be applied toward meeting its emissions goal in 2012.

This fall, six other clients from Europe and Japan also lined up to buy emissions credits from Unified Energy, Mr. Gorkov said. The Toyota Corporation of Japan is co-financing studies at one plant, and may pay for upgrades, according to a Unified Energy Systems statement.

Gazprom, Russia's largest company, is studying ways to attract Kyoto financing to upgrade other pipelines, said Bogdan Budzulyak, director of the company's transportation and underground storage department.

Midsize Russian companies are also eyeing the emissions market.

The Arkhangelsk Pulp and Paper Mill, with revenues of about $250 million a year, has said it will monitor emissions, according to an article in the August 2005 issue of Carbon Finance, a trade publication.

In total, Russia could potentially reduce emissions by two billion to three billion tons of carbon dioxide by 2012, said Alexander A. Golub, a senior economist at Environmental Defense, a nonprofit group based in New York. The potential value for Russia ranges from $20 billion to $60 billion, he said. Or it could be worth nothing, if future climate talks collapse. The United States, the world's largest economy, is already sitting out the process.

President Bush rejected the Kyoto Protocol in 2001, citing the high cost to American industry. Now, without the support of the world's largest economy, there is less chance other countries will agree to extend the treaty beyond 2012. Companies must decide if it is worth investing millions of dollars to comply with an international regulatory regime that may not be enforced after 2012 - and may collapse before then.

"Discussions over the future of the Kyoto Protocol are affecting our market," Mr. Gorkov said.

Even so, emissions trading has been slowed in Russia more by the sluggish pace of government bureaucracy than by uncertainty over the Kyoto Protocol.

The Danish deal was signed in June. It hinged on the Russian government passing a decree to endorse Kyoto trading. That was due in late November, but delayed until February, according to an e-mail message from Hans J. Eriksen, the program coordinator at the Danish environmental ministry.

Annie Petsonk, international counsel for Environmental Defense, said: "This is quite a new commodity for Russia. Maybe they don't understand that Russia has tremendous potential."

Both Gazprom and Unified Energy have issued statements urging the Russian government to enforce Kyoto as quickly as possible. In the United States, in contrast, Exxon Mobil led corporate opposition to Kyoto.

In Russia, the Ministry of Trade and Economic Development has formed a working group to study the decree. It needs to clear various agencies and committees. Russian officials sent a letter of apology to the Danish ministry in November.

Meanwhile, at Unified Energy, where the order book for pollution credit projects is stacking up, Mr. Gorkov is getting impatient. "We needed this document signed yesterday," he said.

I was taught that good social science explains and predicts human behavior. I figure that this time of year we bloggers are expected to make some predictions for the next year.

My problem is that I can't claim to have any deep insights into where oil prices, interest rates or home prices will go over the next year.

Predictions:

1. The 2006 AEA meetings in Boston will be cold but will be a lot of fun. Its a shame that the economics bloggers have been too lazy to co-ordinate planning a group meeting. It is possible that there is such a meeting but that I wasn't invited!

2. I see that Tom Sargent is in charge of the 2007 program for the Chicago AEA meetings. I predict that his program will be filled with cambridge "double difference" natural experiments sessions.

3. Congress will gridlock in 2006 as Democrats prepare for the midterm elections and try to argue that the world is ending under Republican rule. I wish I could make a prediction over what signature issue senator Clinton will choose to stake out a leadership position.

4. My guess is that oil prices will be lower a year from now than they are today. It is an empirical question whether the short recent price spike was enough of a wake up call to encourage a serious increase in exploration for new sources of oil and the development of alternatives.

5. Paul Krugman will be named President Bush's Secretary of the Treasury.

It appears to me that the NYC public transit union has lost this strike. How does this outcome affect other NYC public sector unions such as teachers, cops, firemen, and sanitation? Has the Mayor of NYC gained a reputation for playing "hardball" and will this help lower New York City's taxes per dollar of public services?

There is an old Seinfeld episode where George loses the "Upper Hand" in a relationship with some girlfriend. In a similar spirit, the Mayor of NYC now has the "Upper Hand". How will he use this power? Earlier this year, the sanitation crews implemented new "productivity" tactics of reducing the number of guys who ride on the back of garbage trucks. This raised their average product of labor by reducing L in the fraction Y/L.

Clearly, there are other examples of public sector inefficiencies that lead to big city tax payers paying too much in taxes relative to the quality of services they receive. It will be interesting to see if this Mayor who made billions in the private sector is successful in "re-inventing" the public sector into being a lean mean fighting machine. I will also be interested to see if the elite newsmedia such as the New York Times supports such attempts.

After interviewing an embedded reporter (my father) about how New York City’s Public Transit Strike has affected this city's quality of life, I would like to ask some questions and make a few observations.

1. What is the marginal increase in worker's commute times? How does this increase vary as a function of a person's income and commute schedule? My father is a doctor. His day starts at 8AM and usually ends at 9PM. After the first day of the strike, he is not having trouble finding a cab. But, the cabs now have multiple people in them and this slows him down. In addition, since the subways are not operating there is more traffic on his route and this increases his commute time.

2. During this time of high demand, how could the taxi market be made more efficient? The current problem is that holding commute zone constant, everyone is paying the same price for a taxi ride. If high value of time people could signal that they are willing to pay more for a cab ride, how much would this reduce the deadweight loss of this strike? I'm making the obvious point that there is not enough price discrimination taking place right now and this introduces inefficient queing for cabs. Sticky prices might have excited Keynes but I'm Kahn, not Keynes. To reduce search costs for cabs perhaps a co-ordination device is needed. Permit me to suggest one. If you are willing to pay a premium for a cab, you should wear a Krugman mask and beard. This would differentiate you from other ordinary buyers of this product.

A couple of years ago I published a paper in the Journal of Policy Analysis and Management titled "Demographic Change and the Demand for Environmental Regulation". I was interested in what observable attributes of a person such as his education level predict environmentalism. I used a variety of different micro data sets to measure environmentalism.

Here is a new survey based paper on this subject. The ususal issue arises concerning whether the answers people give to this survey are "cheap talk". Putting that point to the side, this does look like an interesting paper. I would have been interested to see if the authors test whether there is a "U" shaped relation between environmentalism and age. Do the young and old support costly green policies while the middle aged (tax payers) oppose them? The old may be trying to leave a legacy for their grandkids.

One issue that this study faces is separating age from "birth cohort" effects. In the year 2005, a 55 year old was born in 1950. He was at Woodstock! Such an "older guy" might be pro-environment because of the era when he grew up. With a single cross-section of data, the authors can't separate out age from birth cohort effects.



The Generational Divide in Support for Environmental Policies: European Evidence

Joni Hersch, W. Kip Viscusi

NBER Working Paper No. 11859
Issued in December 2005
NBER Program(s): HC

---- Abstract -----

This article examines age variations in support for environmental protection policies that affect climate change using a sample of over 14,000 respondents to a 1999 Eurobarometer survey. There is a steady decline with age in whether respondents are willing to incur higher gasoline prices to protect the environment. This relationship remains after controlling for socioeconomic characteristics. There are age-related differences in information about environmental risks, information sources about the environment, perceived health risks from climate change, and degree of worry about climate change. However, taking these factors into account does not eliminate the age variation in willingness to pay more for gasoline to protect the environment.

When he lives in Berkeley CA, my son drinks organic milk made by the Strauss Family Creamery. Until I looked at the bottle, I didn't appreciate how green a product this stuff is. Ecological economists should be impressed by the "closed loop" nature of this firm's production process. Waste from Cows (an output) is used as an input in the production of electricity. To use a more technical term, this firm transforms "poop into power". I wish that my son could do the same!

The only thing I don't like about the article I reproduce below is that there is no information concerning the cost of setting up this "green power" plant. If it is such a great idea, why have adoption rates been low? Do we need to subsidize this activity to make it happen?

Is Strauss able to charge a "green price" premium because of their production techniques or does the typical consumer view this product as having perfect substitutes?

Press Release
May 13, 2004
Contact: Vivien Straus
(415) 663-5464 x110
family@strausmilk.com

From POOP to Power
Straus Powers Dairy With Methane

MARSHALL, CA - Completing a 5 year process, Straus Family Creamery, California's cutting-edge organic dairy, created electricity today from its new methane digester. The digester captures naturally occurring gas from manure and converts it into electricity.

With this new system, Straus is expected to generate up to 600,000 kWh per year, saving about 6,000 dollars in monthly energy costs.

This process will also eliminate methane, a natural by-product of manure. According to the 2003 U.S. Department of Energy Report on Greenhouse Gases, agricultural sources, primarily animal waste, account for approximately 3% of greenhouse gas emissions.

Funded by California's SB5X alternative energy grant program, this is the first system to take advantage of regulations of net metering law which effectively allows the entire Straus operation to run meters in reverse as excess electricity is sent back into the grid.

Managing manure in a way that protects the environment has always been a goal of Albert Straus, farmer and owner of Straus Family Creamery. A cow can generate 120 lbs of waste per day, which translates to 40,000 lbs. per year per animal. While all waste at Straus dairy is composted and reused as fertilizer, this system provides additional and far-reaching benefits.

The project was funded in part with grants from California's Energy Commission (CEC), Marin County Resource Conservation District (RCD), California Regional Water Quality Control Board, the U.S. EPA and USDA Natural Resources Conservation Service. Other support came from Sustainable Conservation, a non-profit environmental group, which was instrumental in helping farmers get credit for the electricity they send to the grid. Western United Resource Development helped make the grant money available to buy the generator. Williams Engineering Associates designed and managed the project.

"This is one more step towards my goal of having our farm become completely self-sufficient in energy, with minimal environmental impact," Albert Straus stated.

This methane digester is a model solution for one of the greater challenges of the dairy industry.

"The Straus Dairy has again demonstrated leadership to the rest of the dairy community by adopting one of the most environmentally beneficial renewable energy technologies," according Allen Dusault of Sustainable Conservation. "It provides a triple win producing cleaner air and water and a new source of renewable energy."

The Straus dairy has been in operation since 1941. Straus Family Creamery just celebrated 10 years of processing and recently introduced their all organic ingredient Super Premium Ice Creams which are available in natural food and specialty stores throughout the western U.S.


http://www.strausmilk.com/index.php?mod=pr_digester

Will a public transit strike in NYC cripple this town? Perhaps Newman from Seinfeld will offer commuters rides on his rikshaw? How would this City adjust to this surprise?

Relative to their next best employment opportunities, public transit workers seem to have a pretty good deal; namely elatively high pay, early retirement (age 55!) and health insurance.

Alberto Alesina has done some interesting work examining how public employment varies by city. It would interest me what city level characteristics predict whether a city has a "lean and mean" public sector versus a bloated payroll. I would predict that in pro-union states that do not have Right to Work Laws that we are more likely to see the bloated urban public sector. So What? Cities have to run balanced budgets so somebody's taxes have to be raised to pay for these large expenditures. What is the deadweight loss in this case? Clearly urban land owners implicitly pay for inefficient local government.


December 17, 2005
Riders
New Yorkers Wait for Word on How They'll Get to Work
By RICHARD PÉREZ-PEÑA
The day after the strike deadline came and went, the day after the city went to bed not knowing what to expect, it seemed yesterday that New Yorkers had finally started to take the threat of a transit strike seriously. And they were not happy.
After serenely assuring themselves earlier this week that brinkmanship would not give way to an actual strike that would shut down subways and buses, people around the city sounded decidedly more pessimistic yesterday.
"Businesses are going to suffer like mad if there's a strike," said Keith West, 38, who makes deliveries for a linen supply company. "There's going to be a lot of hostile drivers because of the car pooling. It's going to be impossible to drive on the roads. Yesterday our company had to do a double shift just in case there was a strike today.
"Personally, I think they're both being stubborn," he added. "It makes me angry. At Christmas, it's not fair to us."
The union announced yesterday that if no agreement was reached, it would strike on Monday at two bus companies in Queens that have been taken over by the Metropolitan Transportation Authority. And it set a new strike deadline for the entire transit system: 12:01 a.m. Tuesday.
Paul Shatraw, 50, a stay-at-home father from Carroll Gardens, Brooklyn, said the union should work for a time without a contract, if that is what it takes to make a deal. And he warned that whatever good will the public has for the workers could evaporate quickly.
Yet most of the dozens of people interviewed yesterday still sounded more sympathetic to Transport Workers Union Local 100 than to a transportation authority whose actions and officials it has long been civic sport to mistrust.
"I think the T.W.U. has legitimate grievances," said Chris Gordon, 52, a manager with Verizon who lives on Staten Island and works in Manhattan. "I think the M.T.A. was ham-handed in their negotiations strategy. How in the name of God with a billion-dollar surplus they could cry poverty, I'll never know."
Dan Kinckiner, 42, who lives on Long Island, said he did not look forward to getting around the city to visit the clients of his security company without public transport.
"I think both parties are wrong," and the union is asking for too much, he said. But moments later, he added, "I'm not opposed to the strike if they need to in order to get people to listen." As for the transportation authority, he said, "If you have a big surplus, give some back."
Several riders mentioned the holiday fare discounts that the authority is giving, and said they show how well the authority is doing - or show, at least, an insensitivity to the workers during contract negotiations.
What was perhaps most striking was how little the authority's arguments have gotten through to its customers - about deficits looming in future years, enormous debts, mounting pension and benefit costs, and the notion of some rough parity with the great mass of American workers who have had to make concessions on health care, wages and productivity.
Ben Carver, a financial consultant who lives in Bay Ridge, Brooklyn, was one of the few people interviewed who focused his ire squarely on labor. Then again, he is a newcomer to the city, not yet steeped in the culture of bashing transit-system management.
Mr. Carver, 23, says he thinks unions are outdated. "Cutting off everyone's transportation as leverage is ridiculous," he said. "I don't think it's an ethical thing to do."
He would get no argument from Greg Wirth, an actor who lives in Battery Park City and commutes daily by subway. "I almost feel like the threat of a strike is a shakedown."
Far more common was the view of Oscar Lopez, 30, a driver who works with Mr. West for the linen supply company. A strike, he said, "is going to hurt everything," including his ability to navigate the city's streets. But when he argued against a strike, it seemed as much out of concern for the transit workers as anything else.
"I hope they get what they expect to get, but if they go on strike, I don't think that's the way to do it," he said. "Their job is on the line. They'll have to pay fines. It's something they have to think about."
Tamara Powell, 40, who works as a security guard in Astoria, Queens, ordinarily rides the Triboro bus line, one of those the union has threatened to strike on Monday. Yesterday, she was thinking less about the right and wrong of the contract dispute than about the $7 to $9 she would have to pay for a cab to work, and again to get home, if there is a strike.
"It's going to tap into the money I have for Christmas," she said. "I have no benefits, so if I lose a day I don't get paid."
Ann Farmer, Janon Fisher and Colin Moynihan contributed reporting for this article.

Apparently there are investors who care about more than risk and return. Such investors intentionally constrain their asset choice set avoiding companies who pollute or do other evils. Finance researchers have examined how much expected return SRI investors sacrifice (see http://papers.ssrn.com/sol3/papers.cfm?abstract_id=416380).

I'm interested in a different set of questions focused on environmental issues and socially responsible investing. Permit me to list them:

1. Why should we trust the environmental certifiers such as KLD to do a good job in figuring out who are the top 100 firms in terms of "greenness"? If SRI is about more than simply "warm glow" for the investors, if the true goal of SRI is to "change the world", then investors need credible signals indicating which firms are green and which are brown. Is there enough competition in the system of certification to guarantee that "brown" firms can't hide as "green firms"? Does KLD invest enough in updating its records? If a past green company goes "brown", how many years pass before KLD downgrades them and throws them out of the SRI set of green companies? Below I report KLD's methodology for ranking firms.

2. Is it profitable for firms to take costly actions such that they make KLD's top Green 100 list and attract more SRI investment? To answer this question, ideally we would conduct a discontinuity analysis where we would compare the performance of KLD certified "Green Companies" to a control group that would represent similar companies who just missed being assigned the "Gold Star" of being a Green company by the KLD certifier. More formally, I want to know: "is there a treatment effect on a firm's stock performance if it is placed on the SRI buy list?"

3. Selection --- It could be the case that SRI highly ranked companies perform better than other companies for reasons unrelated to being assigned a high rank by KLD on their green index. These companies may have special CEOs or other factors.

My BIG POINT in this blog entry is to make an analogy. After Enron and Arthur Anderson, we learned that accounting firms "cook the books". It is difficult to know a firm's profit levels from seeing its accounting statements. Is a similar point true about environmental accounting? I view KLD and other environmental certifiers as a type of accounting firm. What data do they collect on each company? Do they have the right incentives to create up to date honest rankings of which companies are Greenest versus Brownest? If such firms are "dirty", then the SRI movement will have little impact on bringing about environmental sustainability. To vote their pocket book, investors need correct information. Does the current market structure supply this?

Here is what KLD has to say about itself.

http://www.kld.com/indexes/gc100/faq.html

Methodology

Index Construction

The Global Climate 100 Index includes a mix of 100 global companies that will provide near-term solutions to global warming while offsetting the longer-term impacts of climate change through renewable energy, alternative fuels, clean technology and efficiency.
Constituents are selected from the global universe of companies for their involvement in the following themes: Renewable Energies, Future Fuels, and Clean Technology and Efficiency. In addition to activities in these areas, KLD evaluates each company’s eligibility for the Index based upon its specific climate-related efforts, market influence, geographic distribution, and offsetting negative climate impacts. The leading companies in each category are included on the Index.
The Index seeks companies representing a range of corporate responses to climate change, including a group of large-, mid-, and small-cap companies representing sectors ranging from energy and utilities to industrials and consumer products. As a result, the Index is more broadly diversified than a traditional energy sector index.
The KLD Global Climate 100 Index allocates a 1% weight to each of the 100 constituents to provide higher exposure to small-cap companies and lower exposure to large-cap companies than a cap-weighted index. The weights will vary between quarterly rebalancing, depending on market conditions.
Index Maintenance
KLD continuously monitors constituents on the Index to ensure they meet standards for involvement themes, liquidity and financial viability. KLD may remove companies due to corporate actions resulting in mergers, acquisitions and bankruptcies. KLD may also remove companies at rebalancing if their climate rating falls below an acceptable level. KLD rebalances the Index each quarter to bring each holding back to 1%.

Time consistency is an important idea in dynamics economics. The 2004 Nobel Prize in Economics was partially awarded for macro research on this topic
( see http://nobelprize.org/economics/laureates/2004/ecoadv.pdf).
But, is time consistency an important idea in environmental economics? The Bolivian poor will soon learn that the answer is “yes” as their water supply’s quality will suffer.

Roger Noll and co-authors wrote a very interesting paper focusing on irreversible investment under uncertainty in the case of large water projects (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=181029).

Water projects require enormous upfront sunk cost investments. Once these systems are built, the marginal cost of providing water is quite low. The interesting dynamic issue is whether a LDC nation can pre-commit to a Multinational Corporation and say the following: “If you invest in our nation and build a water delivery system, we will allow you to ex-post “price gouge” (i.e charge price > marginal cost) to allow you to earn a risk adjusted rate of return on your investment.” The problem is that LDC nations cannot pre-commit to do this. What happens is that the poor revolt like in this example below and capitalists anticipate this ex-post effect and get scared off. In this case, the “people” end up being denied quality water even though there are gains to trade possible between the Bolivian people and the capitalists in the developed nation. How could this problem be solved? Perhaps a deep pockets such as the World Bank could offer some form of insurance to the lender. Would this create a moral hazard effect?

Here is the New York Times' reporting on the issue:

December 15, 2005
Who Will Bring Water to the Bolivian Poor?
By JUAN FORERO
COCHABAMBA, Bolivia - The people of this high Andean city were ecstatic when they won the "water war."
After days of protests and martial law, Bechtel - the American multinational that had increased rates when it began running the waterworks - was forced out. As its executives fled the city, protest leaders pledged to improve service and a surging leftist political movement in Latin America celebrated the ouster as a major victory, to be repeated in country after country.
Today, five years later, water is again as cheap as ever, and a group of community leaders runs the water utility, Semapa.
But half of Cochabamba's 600,000 people remain without water, and those who do have service have it only intermittently - for some, as little as two hours a day, for the fortunate, no more than 14.
"I would have to say we were not ready to build new alternatives," said Oscar Olivera, who led the movement that forced Bechtel out.
Bolivia is just days away from an election that could put one of Latin America's most strident antiglobalization leaders in the presidency. The water war experience shows that while a potent left has won many battles in Latin America in recent years, it still struggles to come up with practical, realistic solutions to resolve the deep discontent that gave the movement force in the first place.
That discontent may have found its most striking incarnation in Bolivia. Here, protests against the introduction of stronger market forces have toppled two presidents since 2003. And the discontent has given Evo Morales, a charismatic Aymara Indian and nationalistic congressman who has channeled much of the anger of his poverty-stricken country, a slight lead in the polls ahead of the Dec. 18 elections.
Frustrated that the economic restructuring prescribed by the World Bank and International Monetary Fund failed to translate into sustained growth and reduced poverty, country after country in Latin America has either discarded or is questioning much of the conventional wisdom about relying more on market forces - known as the "Washington consensus" - from the privatization of utilities to the slashing of social spending to unfettered trade.
Much of the policy turn has come under pressure from the streets and the results have varied wildly.
Argentina, for instance, has bounced back from economic collapse by ignoring crucial aspects of I.M.F. orthodoxy the last four years, while accepting others. Ecuador is tottering on the brink of political tumult even as the eight-month-old government of President Alfredo Palacio tries ramping up social spending. In Venezuela, President Hugo Chávez is forming state companies and spending lavishly - some say recklessly - on social programs, pleasing the poor, but failing to generate much foreign investment or business not linked to the overarching oil industry.
Bolivia's back-tracking, more a product of roiling protests than government policy, began after the country became among the first in Latin America to apply market prescriptions wholeheartedly in the mid-1980's. The I.M.F. later asked for far-reaching measures in exchange for loans and other aid, and promised steady growth, up to 6 percent a year, that would cut into poverty.
Bolivia's economy, though, grew at a dismal pace. Even the fund, in a 2003 memo, noted that a fall in per capita income and employment contributed to "rising social tensions that erupted recently."
The fund and other institutions that helped guide Bolivia's economy blame grinding corruption, poor infrastructure and high pension costs. Officials at the I.M.F. also note that Bolivia, like other countries that seek help, come only when they are wracked by economic troubles that require tough choices.
"If you're spending more than you're earning, for a while that's fine," said Caroline Atkinson, deputy director of Western Hemisphere operations for the fund. "But if your borrowing gets too huge, then no one wants to fund you anymore, and you have to cut back."
But to Bolivians, the experiment was marked by failure. Privatized companies like the railroads went bust, while the energy industry is generating $100 million less in taxes and royalties than it did when it was state-run, budget officials said. "They did everything right," said Joseph Stiglitz, a Nobel-winning economist at Columbia University who has been critical of the I.M.F. formula. "They liberalized, they privatized and they felt the pain. Now it's 20 years later and they're saying, 'When is the gain?' "
In the end, market changes pushed by the I.M.F., the World Bank and American-educated Bolivian economists fueled anger that severely weakened governments and gave rise to Mr. Morales. Making his name leading Bolivia's powerful coca growers' federation, Mr. Morales has in the last four years used his outsider status, his "up by the bootstraps" journey from very poor origins on Bolivia's high plains and his Indian roots to rail against market changes he says favor foreigners, not Bolivians.
That is why Mr. Morales is pushing for a "nationalization" of the gas industry that, while not leading to expropriation, will increase taxes and royalties on foreign energy companies; those combined levies were raised earlier this year to 50 percent. He also wants to tighten borders to keep out cheap products and focus the government's attention on cooperatives, a loose mix of indigenous and socialist business practices.
"We will have an economy based on solidarity and reciprocity," Mr. Morales said in an interview. "We do not dismiss the presence of foreign investment, but we want it to be real, fresh investment to industrialize our hydrocarbons, all under state control."
The proposals, to be sure, are vague. Mr. Morales, who did not finish high school, is guided on economic matters by Carlos Villegas, a left-leaning economist, and by his running mate, Álvaro García, a socialist intellectual, professor of sociology and former guerrilla who articulates the party's position.
Much of the anger that has given Mr. Morales momentum began here in his home city, Cochabamba. The arrival of Bechtel quickly prompted heated protests when the water company increased rates, arguing that it needed more money to finance investment and expand service. In some cases, poor people ended up paying double their previous costs. It also became clear that Bechtel would not expand service to the impoverished south, where the company had no profits to gain from an expensive expansion.
The ouster of the company meant the return of Semapa - but this time with more community control. Semapa has expanded service in fits and starts, with those receiving piped water and sewage service increasing to 303,000 people, from 248,000. The company also managed to lower costs and, oddly for a government company, reduce the work force.
But Semapa still grapples with petty graft and inefficiencies, managers at the company said. Its most serious problem, though, is a lack of money. The company cannot secure big international loans, and it cannot raise rates, since few here could pay them.
For a wide-scale expansion that would include a new dam and aqueducts, $300 million is needed, an enormous amount for a company whose capital budget is just shy of $5 million.
"I don't think you'll find people in Cochabamba who will say they're happy with service," said Franz Taquichiri, one of the community-elected directors of Semapa and a veteran of the water war. "No one will be happy unless they get service 24 hours a day."
On a tour of Semapa's facilities, Luis Camargo, the operations manager, explained that the water filtration installation is split into an obsolete series of 80-year-old tanks and a 29-year-old section that uses gravity to move mountain water from one tank to another. It is fine for a smaller city, he said, but what is needed now is to develop high-altitude reservoirs, a hugely expensive undertaking.
"We're trying to be realistic, and we're looking for aid from Canada and other countries," explained Mr. Camargo, who has worked at Semapa 20 years.
Thousands of people have given up on ever getting Semapa's water. At Rafael Rodríguez's home and small restaurant, a spigot in the yard provides water three hours a day from a community well. He has little good to say about Bechtel, but he noted that Semapa's pipes were far from reaching the neighborhood.
"I was hoping water would get here, but it just has not happened," Mr. Rodríguez, 43, said.
Community organizations, each with an average of 200 families, pool money to drill 200 feet into dry, soft dirt, searching for water that is then delivered through small, cheap pipes to homes in the vicinity of each well.
Still, there are many people who cannot even depend on wells. Edwin Villa, 35, lives in a neighborhood that gets its water through deliveries made two or three times a week by freelance water dealers.
The deliveries are sporadic, he said, and sometimes the water contains tiny worms. His children ask for piped water, but there is not much he can tell them.
"Our hope is that someday Semapa will reach this far," he said. "It would just be magnificent."

For a big company such as DuPont, is a $17 million dollar environmental fine serious? Is such a company more concerned about the public relations issue that the media may cover the story because the fine is viewed as "big"? From the EPA's perspective does it seek out high profile polluters and try to "make an example" out of them to scare other firms into regulatory compliance?

From an economic perspective, how does the EPA go about calculating what is the "optimal fine". This task would be much more straightforward if the EPA knew what chemicals DuPont released into the environment and had credible estimates of how a person's health is affected by such chemicals and if it knew how many people were affected. The article below suggests that the released chemical only affected the DuPont workplace. If true then this raises an interesting asymmetric information issue. Workers would have demanded higher wages (combat pay) if they knew that they were being exposed to something nasty as they made Teflon. By hiding this information, DuPont was able to "lure" workers at a lower wage to work at their plant. If DuPont is a rational profit maximizing firm, they would choose to not release this information to the public if the wage savings was larger than the expected regulatory fine = probability of being caught * Fine plus the loss from bad publicity plus perhaps having to pay a larger wage compensating differential because workers may now be more suspicious about what they are being exposed to at such factories.

A harder to quantify issue is the role of political cycles. Did Dupont think that a Bush Administration EPA would be less likely to enforce these laws?


December 14, 2005
E.P.A. Deals $16.5 Million Penalty to DuPont
By MICHAEL JANOFSKY

Washington, Dec. 14 - The Environmental Protection Agency said today that it had agreed to a $16.5 million settlement with the chemical giant DuPont regarding accusations that the company had concealed information about the dangers of a chemical used to make Teflon.

The agreement - $10.25 million in fines and an additional $6.25 million for two supplemental environmental projects - represents the largest civil administrative penalty reached under federal environmental laws, the E.P.A. said.

The settlement exceeded the previous largest penalty by more than $10 million.

The E.P.A. had said DuPont had withheld information about perfluorooctanoic acid, also called PFOA, under provisions of both the Toxic Substances Control Act and the Resource Conservation and Recovery Act. The acid is used in the manufacture of Teflon.

DuPont agreed to the settlement without admitting liability.

"Our interpretation of the reporting requirements differed from the agency's," the company's general counsel, Stacey Mobley, said in a statement on DuPont's Web site. "The settlement allows us to put this matter behind us and move forward. We have already cut PFOA emissions from U.S. plant sites by 98 percent, and we are committed to reducing those emissions 99% by 2007."

The E.P.A. said the agreement sends a "strong message" to companies about warning the public about the potential dangers of chemicals.

"E.P.A. takes violations of toxic substances laws seriously, and is committed to enforcing those laws," said Granta Y. Nakayama, the agency's assistant administrator for the Office of Enforcements and Compliance Assurance. "This settlement sends a strong message that companies are responsible for promptly informing E.P.A. about risk information associated with their chemicals."

The settlement agreement still requires final approval by the agency's Environmental Appeals Board.

DuPont, which said no human health effects are known to be related to PFOAs, said that the two supplemental environmental projects include financing for a research program to evaluate the potential for fluorotelomer biodegradation; and financing for microchemistry and green chemistry programs in certain West Virginia schools.