Environmental economics

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Not to be confused with Ecological economics.
Growth, Development and Environmental Economics in Asia discussion at Chatham House, London
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Environmental economics is a sub-field of economics concerned with environmental issues.[1] It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. ... Particular issues include the costs and benefits of alternative environmental policies to deal with air pollution, water quality, toxic substances, solid waste, and global warming."[2]

Environmental economics is distinguished from ecological economics in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving natural capital.[3] One survey of German economists found that ecological and environmental economics are different schools of economic thought, with ecological economists emphasizing "strong" sustainability and rejecting the proposition that human-made ("physical") capital can substitute for natural capital.[4]

History

The modern field of environmental economics has been traced to the 1960s

Continental Oil Company.[6]

Topics and concepts

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Market failure

Air pollution is an example of market failure, as the factory is imposing a negative external cost on the community.

Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007):[7] "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." This results in a inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability and non-rivalry.[8]

Externality

An

better source needed] Or a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced by Kenneth Arrow and James Meade is provided by Heller and Starrett (1976), who define an externality as "a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of Pareto efficiency".[11] In economic terminology, externalities are examples of market failures
, in which the unfettered market does not lead to an efficient outcome.

Common goods and public goods

When it is too costly to exclude some people from access to an environmental resource, the resource is either called a common property resource (when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or a public good (when use of the resource is non-rivalrous). In either case of non-exclusion, market allocation is likely to be inefficient.

These challenges have long been recognized. Hardin's (1968) concept of the tragedy of the commons popularized the challenges involved in non-exclusion and common property. "Commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.[12]

The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort,

over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however, Ostrom's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons.[12]

The

free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell
(1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.

Valuation

Assessing the economic value of the environment is a major topic within the field. The values of

ecosystem services and, more generally, of natural resources, include both use and indirect (see the nature section
of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children.

Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking

Hedonic pricing examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.[14]

State subsidy

Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year.[15]

Solutions

Solutions advocated to correct such externalities include:

  • Environmental regulations. Under this plan, the economic impact has to be estimated by the regulator. Usually, this is done using cost–benefit analysis. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions, i.e., some firms, in this system, can abate pollution inexpensively, while others can only abate it at high cost. Because of this, the total abatement in the system comprises some expensive and some inexpensive efforts. Consequently, modern "Command and control" regulations are oftentimes designed in a way that addresses these issues by incorporating utility parameters. For instance, CO2 emission standards for specific manufacturers in the automotive industry are either linked to the average vehicle footprint (US system) or average vehicle weight (EU system) of their entire vehicle fleet. Environmental economic regulations find the cheapest emission abatement efforts first, and then move on to the more expensive methods. E.g. as said earlier, trading, in the quota system, means a firm only abates pollution if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.[citation needed]
  • tradeable emissions permits
    , which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction, i.e., only if buying tradeable permits from another firm(s) is costlier. In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems.
  • green tax shift
    ".
  • Better defined
    bioregional democracy). Many markets for "pollution rights" have been created in the late twentieth century—see emissions trading. According to the Coase Theorem, the involved parties will bargain with each other, which results in an efficient solution. However, modern economic theory has shown that the presence of asymmetric information may lead to inefficient bargaining outcomes.[17] Specifically, Rob (1989) has shown that pollution claim settlements will not lead to the socially optimal outcome when the individuals that will be affected by pollution have learned private information about their disutility already before the negotiations take place.[18] Goldlücke and Schmitz (2018) have shown that inefficiencies may also result if the parties learn their private information only after the negotiations, provided that the feasible transfer payments are bounded.[19] Using cooperative game theory, Gonzalez, Marciano and Solal (2019) have shown that in social cost problems involving more than three agents, the Coase theorem suffers from many counterexamples and that only two types of property rights lead to an optimal solution.[20]
  • Accounting for environmental externalities in the final price. In fact, the world's largest industries burn about $7.3 trillion of free natural capital per year.[21] Thus, the world's largest industries would hardly be profitable if they had to pay for this destruction of natural capital. Trucost has assessed over 100 direct environmental impacts and condensed them into 6 key environmental performance indicators (EKPIs).[22] The assessment of environmental impacts is derived from different sources (academic journals, governments, studies, etc.) due to the lack of market prices. The table below gives an overview of the 5 regional sectors per EKPI with the highest impact on the overall EKPI:
Ranking of the 5 region-sectors by EKPI with the greatest impact across all EKPIs when measured in monetary terms[22]
Rank IMPACT SECTOR REGION NATURAL CAPITAL COST, $BN REVENU, $BN IMPACT RATIO
1 GHG Coal Power Generation Eastern Asia 361.0 443.1 0.8
2 Land Use Cattle Ranching and Farming South America 312.1 16.6 18.7
3 GHG Iron and Steel Mills Eastern Asia 216.1 604.7 0.4
4 Water Wheat Farming Southern Asia 214.4 31.8 6.7
5 GHG Coal Power Generation Northern America 201.0 246.7 0.8

If companies are allowed to include some of these externalities in their final prices, this could undermine the Jevons paradox and provide enough revenue to help companies innovate.

Relationship to other fields

Environmental economics is related to

environmental sustainability
and issues of scale.

Environmental economics is viewed as more idealistic in a price system; ecological economics as more realistic in its attempts to integrate elements outside of the price system as primary arbiters of decisions. These two groups of specialisms sometimes have conflicting views which may be traced to the different philosophical underpinnings.

Another context in which externalities apply is when globalization permits one player in a market who is unconcerned with biodiversity to undercut prices of another who is - creating a race to the bottom in regulations and conservation. This, in turn, may cause loss of natural capital with consequent erosion, water purity problems, diseases, desertification, and other outcomes that are not efficient in an economic sense. This concern is related to the subfield of sustainable development and its political relation, the anti-globalization movement.

EnvironmentEquitableSustainableBearable (Social ecology)ViableEconomicSocial
The
three pillars of sustainability
(clickable)

Environmental economics was once distinct from

green economists split off to work on an alternate political economy
.

Environmental economics was a major influence on the theories of

natural capitalism (Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with physical capital
.

The more radical green economists reject neoclassical economics in favour of a new political economy beyond

a transition to renewable energy.

These more radical approaches would imply changes to

bioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism
.

An emerging sub-field of environmental economics studies its intersection with development economics. Dubbed "envirodevonomics" by Michael Greenstone and B. Kelsey Jack in their paper "Envirodevonomics: A Research Agenda for a Young Field", the sub-field is primarily interested in studying "why environmental quality [is] so poor in developing countries."[24] A strategy for better understanding this correlation between a country's GDP and its environmental quality involves analyzing how many of the central concepts of environmental economics, including market failures, externalities, and willingness to pay, may be complicated by the particular problems facing developing countries, such as political issues, lack of infrastructure, or inadequate financing tools, among many others.[25]

In the field of law and economics, environmental law is studied from an economic perspective. The economic analysis of environmental law studies instruments such as zoning, expropriation, licensing, third party liability, safety regulation, mandatory insurance, and criminal sanctions. A book by Michael Faure (2003) surveys this literature.[26]

Professional bodies

The main academic and professional organizations for the discipline of Environmental Economics are the Association of Environmental and Resource Economists (AERE) and the European Association for Environmental and Resource Economics (EAERE). The main academic and professional organization for the discipline of Ecological Economics is the International Society for Ecological Economics (ISEE). The main organization for Green Economics is the Green Economics Institute.

See also

Hypotheses and theorems

Notes

  1. ^ "Understanding Environmental Economics". Investopedia. Retrieved 2022-05-01.
  2. ^ "Environmental Economics". NBER Working Group Descriptions. National Bureau of Economic Research. Retrieved 2006-07-23.
  3. ^ Jeroen C.J.M. van den Bergh (2001). "Ecological Economics: Themes, Approaches, and Differences with Environmental Economics," Regional Environmental Change, 2(1), pp. 13-23 Archived 2008-10-31 at the Wayback Machine (press +).
  4. ^ Illge L, Schwarze R. (2009). A Matter of Opinion: How Ecological and Neoclassical Environmental Economists Think about Sustainability and Economics . Ecological Economics.
  5. ISSN 1056-3466
    .
  6. ^ Rosser, Barkley Jr. (September 13, 1998). "Paul Davidson's Economics" (PDF). Working Paper No. 251. Archived (PDF) from the original on 2010-12-29.
  7. ^ Hanley, N., J. Shogren, and B. White (2007). Environmental Economics in Theory and Practice, Palgrave, London.
  8. ^ Anderson, D. (2019). Environmental Economics and Natural Resource Management, [1] Routledge, New York.
  9. ^ Rita Yi Man Li (2012), The Internalisation Of Environmental Externalities Affecting Dwellings: A Review Of Court Cases In Hong Kong, Economic Affairs, Volume 32, Issue 2, pages 81–87
  10. ^ Chapman, Same (May 3, 2012). "Environmental degradation replaces classic imperialism". The Whitman College Pioneer: Whitman College.
  11. ^ Heller, Walter P. and David A. Starrett (1976), On the Nature of Externalities, in: Lin, Stephen A.Y. (ed.), Theory and Measurement of Economic Externalities, Academic Press, New York, p.10
  12. ^ a b Ostrom, E. 1990. Governing the Commons. Cambridge: Cambridge University Press.
  13. ^ UK Government Official Documents, February 2021, "The Economics of Biodiversity: The Dasgupta Review Headline Messages"
  14. ^ Harris J. (2006). Environmental and Natural Resource Economics: A Contemporary Approach. Houghton Mifflin Company.
  15. ^ UK Government Official Documents, February 2021, "The Economics of Biodiversity: The Dasgupta Review Headline Messages" p. 2
  16. OCLC 1039849897
    .
  17. ISSN 0022-0531. Archived
    (PDF) from the original on 2006-09-01.
  18. ISSN 0022-0531
    .
  19. ISSN 0014-2921
    .
  20. S2CID 158059174
    .
  21. ^ Roberts, David (2013-04-17). "None of the world's top industries would be profitable if they paid for the natural capital they use". Grist. Retrieved 2022-12-14.
  22. ^ a b Joseph (2013-04-01). "Natural Capital at Risk: The Top 100 Externalities of Business". Capitals Coalition. Retrieved 2022-12-14.
  23. ^ "THE EVOLUTION OF ENVIRONMENTAL ECONOMICS: A VIEW FROM THE INSIDE" (PDF).
  24. S2CID 73594686
    .
  25. ISBN 978-0-8213-9552-3. Archived
    (PDF) from the original on 2012-05-21. Retrieved 15 January 2015.
  26. ISBN 9781843762348
    .

References

Further reading