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Posts Tagged ‘environmental economics’

I want to draw attention to three mostly unrelated points. The first (which was in the friday links) is that Ben Bernanke devoted a commencement address to the economics of happiness. Here’s a notable excerpt:

Easterlin’s own view, taking an economic perspective, is that people’s happiness depends less on their absolute wealth than on their wealth compared with others around them…

Human adaptability, which I mentioned earlier, also helps to explain the Easterlin paradox. Rich or poor, you tend to get used to your circumstances. Lottery winners get used to being wealthier, and their psychological state may ultimately be not much different than it was before buying the winning ticket…

life satisfaction requires an ethical framework. Everyone needs such a framework. In the short run, it is possible that doing the ethical thing will make you feel, well, unhappy. In the long run, though, it is essential for a well-balanced and satisfying life.

Second, I thought David Ruccio had a keen response to Akerlof and Kranton’s Identity Economics piece:

I certainly don’t want to argue against the importance of social identities and norms within organizations, large and small…But Akerlof and Kranton’s is an impoverished notion of how social identities and norms work, and how they are reproduced over time.

First, they forget all about notions of fairness and justice, as frames of reference for organizational identities. If the existing norms are considered unfair or unjust, why should they be followed?

Second, they write nothing about power, much less notions of ideology, propaganda, or exploitation. For example, the panopticon works—it keeps people aligned with the correct functioning of the organization—because it induces a sense of permanent visibility that ensures the functioning of power.

Third, from the profile of Cass Sunstein, we see some wrong-headed discount rate thinking. At least the author brings up the ethical point:

In OIRA’s cost-benefit calculations, the government’s willingness to spend depends on…the social cost of carbon…All else being equal, if given a choice between paying $1 million now and $1 million five years from now, economists will choose to pay later…

The problem, Sunstein says, is that we might do irreversible damage to the planet while blithely waiting for the price of action to drop just enough…

The debates over the discount rate are less mathematical than moral. Spending money now to prevent climate damage that won’t appear for decades is a tax on present generations; declining to spend now is a tax on the future. The British government several years ago assigned the economist Nicholas Stern to value the cost of climate change. Stern’s vision was nightmarish…

As an academic, Sunstein seemed to side with economists like William Nordhaus at Yale, who set the discount rate at about 5 percent, which would counsel patience. “It’s not clear what direction the risk of error cuts in,” he told me. “If we err, 7 percent could be bad,” he said, but “if we err, 1 percent could be bad also.” A low a discount rate might protect the environment by spurring us to sacrifice now — while damaging the economy, increasing poverty and putting more people out of work…

So the strategy is too find a price that sounds right, and back the discount rate out? Seems so unrigorous.

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I just started reading Paul Collier’s new book The Plundered Planet: Why We Must–and How We Can–Manage Nature for Global Prosperity, which was released this week. I’m going to do a proper review of it in a couple of weeks, but the first chapter struck me in light of my post from two weeks ago about why environmentalists don’t trust economists. In the book, Collier will apparently try to play the role of referee between two factions- romantics and ostriches. Romantics are skeptical of growth and want to preserve at all costs, while ostriches will plunder nature for the cause of economic growth.

Although many may not admit it, I think there are a lot of both types within the margins of the environmental discussion. There are enough, in fact, to build the mistrust I was posting about. Collier attributes the existence of both camps to a misinformed public. Interestingly, though, he seems to ascribe more blame to economists, who treat nature “as they do any other asset…to be exploited for the benefit of mankind.” He then aptly cites Nicholas Stern (whose higher carbon price has been mostly ignored since its release in 2006), who has argued that the issues with climate change “are not technical, but ethical.”

His words for economics are harsh:

As adopted by economists, Utilitarianism is an austere, universal value system that is impossibly demanding…Given the gulf between the values economists use to judge the world and the values they assume ordinary people to hold, many economists conclude that ordinary people cannot be trusted adequately to protect the interests of the future.

That value gulf, I think, is the key issue. Economists don’t just dislike the values of environmentalists- they don’t trust them to the point that they position themselves to make value judgments, hidden in technospeak. Environmentalists know this and thus don’t trust them, and we end up with a vicious cycle that radicalizes both sides and results in mistrust. Will Paul Collier broker a compromise? Stay tuned.

Disclosure: I was sent a copy of the book by the publisher, Oxford University Press. This post and my forthcoming review are of my own volition, not in exchange for receipt of the book.

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According to the New York Times, farmers are now struggling to cope with Roundup-Resistant weeds. Some excerpts:

On a recent afternoon here, Mr. Anderson watched as tractors crisscrossed a rolling field — plowing and mixing herbicides into the soil to kill weeds where soybeans will soon be planted.

Just as the heavy use of antibiotics contributed to the rise of drug-resistant supergerms, American farmers’ near-ubiquitous use of the weedkiller Roundup has led to the rapid growth of tenacious new superweeds.

To fight them, Mr. Anderson and farmers throughout the East, Midwest and South are being forced to spray fields with more toxic herbicides, pull weeds by hand and return to more labor-intensive methods like regular plowing.

“We’re back to where we were 20 years ago,” said Mr. Anderson, who will plow about one-third of his 3,000 acres of soybean fields this spring, more than he has in years. “We’re trying to find out what works.”

Farm experts say that such efforts could lead to higher food prices, lower crop yields, rising farm costs and more pollution of land and water.

“It is the single largest threat to production agriculture that we have ever seen,” said Andrew Wargo III, the president of the Arkansas Association of Conservation Districts.

Resistant weeds are just the expected evolutionary consequence of the herbicides, highlighting once again the tenuous nature of US agricultural production. Of course, the agribusiness industry will look to “innovate” the solution in the form of a new pill or the next herbicide. Until that again fails.

The alternative, of course, is to go back to sustainable, earth-friendly, smaller-scale and less profitable growing techniques that integrate the farm to form a closed, no-waste system. Advocates of this system are not against innovation, but are concerned with what kind of “innovation” the system promotes. The level of technology should not be thought of as a neutral, linearly increasing pile of knowledge. There are different types of innovation and we should be able to discuss, as a society, which forms will make us best off and encourage those.

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I’ve written a lot here about climate change and environmental economics, trying to point out weaknesses and blind spots in the cap and trade approach. Before I digress, then, let me say that I think getting ACES passed through the Senate would be a step in the right direction. Just like health care reform, I’m aware of the political limitations, disappointed in the state of the discourse, but realizing that right now, something better isn’t possible (unless, of course, the EPA shows it’s willing to get the job done without Congress- then, that would be preferable).

Today, though, 5 environmental groups said that the Senate bill simply isn’t good enough- it’s a step in the wrong direction. Let’s not over-interpret this. Tuesday, 31 environmental groups came out in favor, as the article notes. Nevertheless, I think opposition to the bill from the “left” demonstrates tensions between environmental groups and economists, and I find myself quite sympathetic to the environmentalists. Environmental Economics argues that these tensions should be set aside, that environmental economists are on their side:

Writers like David Roberts and Bill McKibben, who routinely characterize mainstream economics as somehow antithetical to environmental concerns, are inadvertently spreading the exact narrative that the Right wants everybody to buy into…The overwhelming majority of mainstream economists favor stronger environmental regulation on many fronts, especially climate change…The public needs to know that most of the leading minds in economics come down squarely in favor of strong climate change legislation, as well as efforts to improve water quality, clean air, and biodiversity protection.

I don’t disagree with much of what he says, but I think that the author ignores the root causes. Before I get into that, I’d like to highlight Frank Ackerman’s post at RWER about underestimating the social cost of carbon:

So far, the administration’s interagency working group that has been studying the SCC has come up with a range of values, with a “central” estimate of $21 per ton of CO2 in 2010, or roughly 20 cents per gallon of gasoline. Over time, the SCC would rise, but only to $45 per ton (in 2007 dollars) by 2050…

But this doesn’t need to be the last word. In fact, it absolutely shouldn’t be, because the analysis that led to that number is based on deeply flawed economics, omissions, and poor value judgments…

For starters, it relies on an overly narrow review of climate economics, relying on a handpicked set of models — FUND, PAGE, and DICE — that happen to produce very low SCC estimates. All three models have serious problems…

We also found that the working group was aggressive in “discounting” the value of future costs, considering rates of 2.5 to 5 percent per year that trivialize future damages…

A last and very serious concern is that the SCC calculations don’t take into account the small but hugely important risk of catastrophic climate damage…

There are too many open questions in the SCC calculation to recommend a precise alternate value based on the information now available; there is a need for more extensive research, examining the full range of available studies of climate damages and costs, and analyzing assumptions about the risks and magnitudes of potential climate catastrophes. In the United Kingdom, where carbon pricing and cost calculations have a longer, better-researched history, the latest estimate is a range of $41 to $124 per ton of CO2, with a central case of $83.

I don’t think Ackerman’s concerns can be easily explained away, and I’m willing to duke it out in the comments over each assertion. The upshot of his assertion is that there is a lot of play in these models for a number of parameters. Sure, we could take the three issues (climate model, discounting, and fat tails) and produce a 3-D table of SCCs under every permutation. We could even take the middle estimate in each parameter, get our number, and go home- it would probably end up a lot higher than $21/ton. However, that still wouldn’t get to the heart of it.

The problem is that economists, as the go-to people on this issue lately, are being asked to make “value judgments,” as Ackerman rightly puts it, on these 3 issues. And they are value judgments- I’ll argue that one too. Economists should not be deciding what the future is worth, what the value of a catastrophe is, or the relative value of a life across countries. So, even if most environmental economists got in the game because they love the environment, they’ve been corrupted by the play in these parameters, and the ease with which their assumptions can generate a nice number (I’m not trivializing their models, which were undoubtedly the fruits of hard labor of thought). They can assume whatever to generate the number that “looks” right, i.e. gets something done and is politically feasible.

But that’s not the role of economists. The role of economists is to allow the debate to center where the center actually is. By making choices they shouldn’t be allowed to make, they force environmentalists to compromise twice: once to get the number that “looks right,” and then once again when the politicians bear their claws and create a neverending set of loopholes. I suppose having written all of this, and working up quite an angry sweat, I’m something of an environmentalist. I don’t have any beef with environmental economists for the work they do- rather, it’s their place in the system, and how their work gets used, that I tend to oppose. It’s the system, man. It’s unfortunate, but that’s why environmentalists don’t trust economists.

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I saw a film last night called Lords of Nature: Life in a Land of Great Predators, which demonstrated that the elimination of great predators can have vast effects on their ecosystems. Predators in general have been run out of the lower 48 states; in particular, the absence of the wolf in places like Yellowstone National Park, Minnesota, and Wisconsin has had surprising effects on the forests they used to stalk. The basic argument in the case of wolves is this: wolves prey on deer and elk, whose foraging stunts the growth of new forest flora, leading to tree decline and thus struggles for lower species and the landscape itself.

The filmmakers pointed to a number of examples, including Yellowstone and Zion National Park in Utah where tourist fears of wolves led to their expulsion from these areas and thus to the decline of the overall ecosystem. Wolf reintroduction has been successful in restoring the ecosystems. Thus, the next frontier for wolf reintroduction are areas where human conflict is more direct- with cattle ranchers in the West and sheep herders in the North. However, concerted efforts among government agencies, NGOs, and even Deer Hunter Associations have allowed successful cohabitation of domesticated livestock and wild predators. Targetted herding can ensure that wolves primarily prey on the overpopulated deer and elk, and not on valuable livestock.

Of course, the buildup to the predators’ decline was decidedly human. Shortsighted interventions aimed to protect “assets” and maximize profits led to the one-sided demonization of particular species. Forgive me if I’m reaching as I argue this case is an example of capitalism’s unilateral drive for profit and ignorance of their long-term folly.

A not dissimilar thing is happening with bee colonies- the New York Times has an article about the collapse of wild bee populations and the failure of domesticated beehive increases to compensate. The problem isn’t necessary bee collapse itself- it’s that humans are asking too much of them.

This wouldn’t mean the end of human existence, but if we want to continue eating foods like apples and avocados, we need to understand that bees and other pollinators can’t keep up with the current growth in production of these foods.

The reason is that fruit and seed crops that are most dependent on pollinators yield relatively little food per acre, and therefore take up an inordinate, and increasing, amount of land. The fraction of agriculture dependent on pollination has increased by 300 percent in half a century.

What happens when lands are converted for crops? Wild bee populations decline:

The paradox is that our demand for these foods endangers the wild bees that help make their cultivation possible. The expansion of farmland destroys wild bees’ nesting sites and also wipes out the wildflowers that the bees depend on when food crops aren’t in blossom. Researchers in Britain and the Netherlands have found that the diversity of wild bee species in most regions in those countries has declined since 1980.

Human replacement of wild bee populations can only go so far, and it cannot replace the biodiversity necessary to sustain an ecosystem. Of course, this aspect was present in Lords of Nature as well. The presence of great predators does not just favor certain types of flora in a zero sum-game; it also forces the rapid evolution and adaptation of fauna, creating a bevy of biodiversity. Try as we may, we’ll never be able to put a value on this biodiversity. As these episodes point out, ecosystems are complex, and it’s very arrogant for humans to assume that simple valuation will preclude unintended consequences.

Reducing human impact on nature is a good in and of itself. It may mean sacrifices as well:

If we want to continue to enjoy almonds, apples and avocados, we have to cultivate fewer of them, more sustainably, and protect the wild bees that help make their production possible.

Similarly with the predators, we may have to be willing to pay more for livestock goods and consume less, as further predator reintroduction will result in losses. However, the benefits that come from these sacrifices appears to compound over time, so it’s necessary that we not underestimate the value of nature.

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The cap-and-trade scheme under consideration in Waxman-Markey relies heavily on carbon emission offsets, whereby developed countries buy the right to emit more by offsetting emissions elsewhere. Offsets carry a number of issues, which I’ve begun to discuss in the context of cap-and-trade here and here. Three aspects I’d like to talk a little more about are the effects of offsets in the “elsewhere” countries, the uncertainty abou their valuation, and implementation issues

I was first drawn to a recent article published by Ben Block of Worthwatch Institute about the prospects of REDD, which is the mechanism aimed to reduce emissions from deforestation and will play . The Copenhagen Accord offered support for this mechanism, and on the surface, it seems like a good way for less developed countries to be rewarded for their preservation of otherwise endangered lands.

While support for the policy has grown, considerable progress is still necessary before multinational organizations, national governments, and local authorities are ready to administer REDD programs, analysts said. Without proper reforms, the program threatens to increase human rights violations, land conflicts, and forest-sector corruption, and REDD’s ability to reduce emissions would be in doubt.

“If significant payments were to flow today, REDD programs would be challenged to meet the tests of effectiveness in reducing emissions, efficiency in channeling funds, and equity in distribution,” said Frances Seymour, director general of the Indonesia-based Centre for International Forestry Research.

Land is certainly the key issue, as land rights are generally poorly defined in less developed countries, and land reform is often a contentious part of domestic politics. Under REDD, payments flow to the owners of the land. However,

Governments continue to claim ownership of most forestland – some 75 percent worldwide, according to a report released last month by the Rights and Resources Initiative. In many cases, however, farming communities and indigenous groups have resided on much of the land for generations…

In areas where land rights remain unclear, governments or private industry may displace forest communities from their homes to gain access to forest carbon, human rights campaigners warn. Where indigenous groups or communities clearly own the forests, environmental and human rights groups are reporting instances of REDD project developers offering contracts without fully explaining the deals’ consequences.

Land ownership conflicts are not merely hypothetical. Indigenous peoples’ rights have become a large enough issue that the African Commission on Human and Peoples’ Rights recently handed down a landmark ruling on a Kenyan eviction case from 1973. The linked column notes,

By taking into account rights flowing from an indigenous community’s deep cultural and historical connection to the land, the commission’s ruling sets an important precedent for respecting the claims of traditional herders and forest peoples…

However, while Kenya has never been better positioned to rise to the challenge, political will to convert legislation into real change on the ground cannot be taken for granted.  Successful implementation of the ruling on the Endorois will require vital monitoring support from the commission itself.

The stakes on land issues are undoubtedly going to increase with REDD, and it’s unclear if African governance is adequately prepared to handle it. By embracing offsets, and REDD with them, the developed world could be unwittingly open up a destabilizing can of worms.

The other issue I want to raise is environmental valuation. I think this valuation can be a good thing. For instance, an eye-popping report was just released that said the world’s largest corporations caused $2.2 trillion of environmental damage in 2008, half of which was from CO2 emissions, in total equivalent to 1/3 of these company’s profits. Making the public aware of these huge damages is critical. However, the tricky thing with environmental valuation is that even if high totals like this one are reached, they may still be underestimates.

Ed Fullbrook at RWER points to two Guardian articles, one that favors valuing the environment, and one that raises valid concerns. In the first article, Pavan Sukhdev says that,

We cannot manage what we do not measure and we are not measuring either the value of nature’s benefits or the costs of their loss. We seem to be navigating the new and unfamiliar waters of ecological scarcities and climate risks with faulty instruments…

Holistic economics – or economics that recognise the value of nature’s services and the costs of their loss – is needed to set the stage for a new “green economy”.

Contra Sukhdev, Andrew Simms writes,

 there is a point when it becomes meaningless to treat the ecosystems upon which we depend as mere commodities with a price for trading. For example, what price would you put on the additional tonne of carbon which, when burned, triggers irreversible, catastrophic climate change? Who would have the right to even consider selling off the climate upon which civilisation depends? The avoidance of such damage is literally priceless.

Fullbrook notes that,

Simms sees this new enthusiasm as an economist’s fool’s-gold, but one that potentially is infinitely more damaging…

This dilemma between wanting to make polluters pay and avoiding the ultimate category mistake urgently needs to be discussed. We must also learn not to tie ourselves in nonsensical knots when using side-by-side the terms “value”, “price” and “measurement”.

The concern of underestimation, perhaps even exaggerated by Simms, is a valid one. However, economists feel the need to place a value on everything. Offsets essentially are founded on the ability to value certain environmental activities and abstentions. If they miss the mark (and my guess is they will skew to underestimation), the environment and our economy’s future capability will suffer.

Finally, even if offsets can be correctly valued and land issues reconciled, will they actually, err, offset any emissions? Stacy Feldman at SolveClimate has an investigative piece on some of the issues with offset schemes.

“It’s essentially the wild, wild west,” said Andrea Johnson, the forest campaigns director for the non-governmental Environmental Investigation Agency. “Everybody is kind of auditing themselves to a large extent. There is no one system.”

Because these projects can be in far off lands that are tough to track, it can be hard to know what’s real and what’s hype, other than trusting what the company says, said Jutta Kill, head of the climate and forests campaign for UK-based FERN.

Further, projects are being outsourced to the private sector, and companies involved may not be able to follow through. Eco2, which is running a tree-planting in Sumatra, is one example:

In an updated financial disclosure document filed in December, the company said its operations are dependent upon its ability to raise “significant amounts of capital,” but “there is no assurance that such capital can be raised…” […]

In its quarterly report to the SEC in September, Eco2 was more direct: “The company’s cash and available credit are not sufficient to support its operations for the next year.” […]

The Eco2 advantage, says the firm, is its fast-growing strain of Kiri tree.

“Seven years is incredibly quick,” said FERN’s Jutta Kill, who said she had never heard of the Kiri tree.

If Eco2 claims to generate carbon credits that quickly, it means one thing: They’re growing tree plantations of non-native trees “rather than a forest,” said Kill…

Fred Stolle, a program manager for WRI’s Forest Landscape Objective, said a fast-growing species is not a strong selling point for carbon reduction.

“Every pulp and paper company in the world has fast-growing timber species,” Stolle said. Even if “it might be some super-duper tree that has more carbon in it, if you cut it down and use it for paper and pulping, then you still get some emissions of carbon.”

“And if you use it for firewood, of course you burn the whole thing. I don’t see any reason why that form of business should get carbon credits,” he said….

The other major key to Eco2’s model is selling carbon credits before the trees exist, a common practice…But according to Kill, forward selling is risky for investors and local communities.

These problems exist with offsets as a relatively small sector. However,

If the U.S. adopts a cap-and-trade system, it “would then retroactively let a lot of those voluntary offsets into the new system, and the price would just skyrocket — triple or quadruple overnight,” he said. “That’s why there are so many carbon cowboys trying to get in early. They are not really concerned with the quality of their product; they are more concerned that they get in.”

Global carbon trading has become the classic speculative market, said Kill, where people trade only for the purpose of profiting…

The system is helped by the fact that there is little time and money for quality control.

I apologize for the length of this post, but I think the issues associated with offsets are critical for understanding the shape of climate legislation. This fight may be in vain, as REDD seems even more firmly seated in conventional wisdom than cap-and-trade itself. Nevertheless, policy makers need to think long and hard about the human and environmental consequences of adopting this flawed mechanism.

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A couple of weeks ago, James Hansen had an op-ed in the New York Times against a cap-and-trade system. After reading it, my hope was that it would get people’s attention and begin to shift the public discourse against cap-and-trade. I was disappointed when I saw that Paul Krugman denounced him as “unhelpful Hansen” that same morning, arguing, that between a cap-and-trade versus fee-and-dividend system,

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.

Thus,

It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.

He also pulls the economist trump card:

Things like this often happen when economists deal with physical scientists; the hard-science guys tend to assume that we’re witch doctors with nothing to tell them, so they can’t be bothered to listen at all to what the economists have to say, and the result is that they end up reinventing old errors in the belief that they’re deep insights.

Well, Hansen was obviously miffed about this post as well, because like me, he generally agrees with Krugman’s insights. Today, Hansen responds on the SolveClimate blog. He starts out with a key fact:

As long as fossil fuels are the cheapest form of energy their use will continue and even increase.

Then he takes on Krugman’s arguments one-by-one:

Krugman Argument #1: Cap‐and‐trade is the only way to get an effective agreement rapidly.

That is a myth. In fact, every cap‐and‐trade regime has taken many years to hammer out. Kyoto negotiations dragged on a decade and were not completed. Individual countries had to be bribed to participate, yet some still would not. And the result was not successful, as we have seen.

Proposed cap‐and‐trade within the United States would be even more complex than “Kyoto.” […]

Fee‐and‐dividend, in contrast, is defined by a single number: the fee (tax) rate that the fossil fuel companies must hand over at the first sale of oil, gas or coal…

International agreement requires principally that the United States and China agree to apply such internal fees across the board on fossil fuels at the mine or port of entry. Agreement on such action is in the best interests of both nations, making it far easier to reach than agreements on caps…

Next, and this rebuttal is the key one,

Krugman Argument #2: Cap‐and‐trade and fee‐and‐dividend are really equivalent.

Krugman says that the fee‐and‐dividend I propose is “essentially equivalent” to cap‐and‐trade. Here I may not have been clear. I do not dispute the economic theory that a cap and a fee are, in principle, equivalent. But cap‐and‐trade’s complexity allows special interests to take over, killing its effectiveness.

The devil is in the implementations…

One can appreciate the difference in transparency by comparing the 2,000‐page Waxman‐Markey cap‐and‐trade bill with the simplicity of a single fee (tax) rate on fossil fuels. With fee‐and‐dividend we know who gets the money – equal amounts to all legal residents…

Finally, he disagrees with Krugman’s lack of concern over Wall St’s involvement in these markets. Although he only gets to it in the conclusion, my core concern with the market’s involvement in carbon is, as Hansen says,

Caps inherently cause prices to fluctuate wildly. Even if legislators attempt to outsmart the market by building in limits on the fluctuations, there is still uncertainty in the impact on energy prices. Business people need to have confidence about how prices will change in the future. Ditto, the public.

I think Hansen wins on the technical points about which is better. I wonder if fee-and-dividend can pass, primarily because it gives less to special interests.  However, W-M might be DOA in the Senate anyways, and I think the idea of a public dividend can make the bill more palatable to the fossil fuel-dependent constituencies (read: voters, not dollars).

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