What is Environmental Economics?

Chapter 1 - BCF

What is Economics? In any economy there are competing

objectivesThe important players could be

Gov’t Households Businesses Nonprofit Org

Environ Eco is the application of the principles of economics to the study of environmental resources, how are they developed and managed.

It focuses primarily on how and why people make decisions that have environmental consequences. It is also concerned with how economic institutions and policies can be changed to bring these environmental impacts more into balance with human desires.

Derived more from microeconomics than macroeconomics. Hence, the first lecture is devoted to sketching out the kinds of questions environmental economists ask and the answers they seek

Economic Analysis Environ Eco focuses on

Society’s natural and environmental resources Examining the way people make decisions that

lead to either environmental destruction and environmental improvements

People pollute because… It’s easy and cheap (Waste Disposal) Decision-making dependent upon certain set of

economic and social institution Structure of incentives (monetary and non-monetary)

Distinction between normative and positive economics

Pollution is a result of the profit motive? Entrepreneurs don’t pay any heed to

environmental impact because it doesn’t pay What would you do to reduce environmental

pollution? But..

Individual consumer pollutes as well (Cars, etc)Non profit government agencies polluteCommumist regimes v/s capital economy

Therefore, any system will produce environmental damage if the incentives within the system are not structured to avoid them

Environmental degradation is a result of human behavior that is unethical and immoral

So, to get people stop polluting, one way is to increase general level of environmental morality in the society

Problems to moral reawakening...? Is it applicable for a problem with ethical

dimensionCan we enforce certain policies?Are we targeting right environmental objectives?

So, it is the way the economic system has been arranged!

INCENTIVES:An economic incentive is something that leads

people to channel their efforts at economic production and consumption in certain directions

Household example… People charged on each trash bag they put on

the curb That reduced amount of solid waste and lead

to huge amount of recycling Illegal dumping and difficulties with applying

the plan to household apartments

Incentives In IndustriesProblems:

Profit motive Use environmental resources for waste disposal Such services have been virtually free

Solutions: Enforce laws making pollution illegal Charge firms for pollution-causing material they

emit into environment European industries (CO2 taxes) Possible Affects…?

Incentives in Transportation:Widespread use of automobile and its

ownershipDetrimental to human health and

environmental damage Environmental Economists have termed

the word, External costs in order to describe a certain set of costsSome countries have proposed establishing

road charges on drivers to recognize the external costs

Design of Environmental Policy

There is an enormous range and variety of public programs and policies devoted to environmental matters at all levels of government

Vary in terms of effectiveness and efficiency

Environmental Protection Agency (EPA) Director quoted as saying,“… at this level

of expenditure, there is a very large obligation to get it right.”

Clean Air Act (1990)

Revolved around three air pollution problems:Urban smogEmissions of SO2

Other toxic chemical emissions

The law included things like:New technologiesProduction of super clean carsNew standards for toxic emissions

But is just composing a well written piece of policy a cost-effective way of attacking air pollution problems?

A major problem of environ policy: Perverse Incentives – incentives that work against the overall objectives of the policy

Environmental Economist is supposed to measure a policy in terms of cost effectiveness, getting the most pollution reduction for the money spent, aptly balancing costs and benefits

Macroeconomic questions: Environment and Growth? Micro: Individuals, small groups of consumers,

polluting firms etc Macro level aims?

Two main questions arise: Relationship between environmental-pollution control

measures and the rate of growth and unemployment Impact of economic growth on environmental quality?

What way is the relationship?

Developed vs. Developing countries…?

Cost-effective analysis:This is simply an analysis where we look for

the least expensive way of achieving a given environmental quality or target

Example, reducing CO2. Studies of this sort require close coordination of scientific and engineering analysis to determine realistic technical parameters and economic analysis to determine the values associated with these parameters

Benefit Cost Analysis:Main analytical tool used by economists to

evaluate environmental decisions.Used widely in public sectorAn aid in selecting efficient policies, agency

uses it to justify it’s workingsUsed to try and stop new regulations or

weaken old ones

The approach implies consideration of both benefits and costs – and this often puts such studies in the middle of political controversy on many issues

International Issues:Destruction of Ozone layerGlobal Warming

Economics and Politics:How to achieve effective environmental policy

in a highly political policy environment?Environmental policy decisions come out of

the political process where people and groups come together and contend for influence and control, where interests collide, coalitions shift, and bias intrude

So where does it leave environmental economist then? The best way for scientists and economists to

serve is to produce studies that are as clear and as objective as possible

It is politician’s job to compromise or seek advantage and it is scientist’s job to provide the best information to policymakers on alternative courses of action.

The Economy and the Environment

Chapter 2 – BCF

Economy It is a collection of technological, legal, and

social arrangement through which individuals seek to increase their spiritual and economic well-being

The two elementary economic functions are: Production Consumption

Economic System:Exists within and is encompassed by natural

world

Economy

Raw Materials (Inputs, Natural Resource Economics)

Residuals, (Environmental Economics)

Impact on environment is not specific to discharge of pollutants; any scenic degradation or habitat disruption also worsens the environment

Natural Resource Economics:Application of economic principles to the

study of activities like extraction and utilization of natural resources

Mineral Economics: Apt rate at which ore shall be extracted from mine, affect on mineral prices after exploration and addition

Forest Economics: Government policies affecting harvest rates and timber companies

Marine Economics: Apt rate at which fisheries should be managed, Affects on stocks of fish

Land Economics: Role of private sector, property laws and regulations

Energy Economics: Relationship between energy use and energy prices?

Water Economics: Reallocation of water from agriculture to urban areas? Use of water?

Agriculture Economics: Support prices? Use of subsidies on farmers and production of crops?

Renewable and nonrenewable Resources:The living resources such as fish and timber

are renewable as they grow according to biological clocks and process

Non-living classis example: Sun’s energyNonrenewable resources have no processes

of replenishment—once gone, they are gone forever such as petroleum reserves and some minerals

Low replenishment rates..? Intertemporal trade-offs exist with

renewable and nonrenewable resources

Biological and ecological processes create connections between present and future generations.

Sustainability: choosing rates of use today so that they don’t jeopardize future generationsHow can it be defined for renewable and

nonrenewable resources…?

Depletion of earth’s assimilative capacity. Example: CO2,, heavy metals

Biologists estimate that there are more than 30 million species on earth making genetic information very useful in the fields of medicine, pesticides and so on

Habitual conservation and species preservation are contemporary resource problems

Blurring edges between natural resources and environmental resourcesResource extraction directly affects

environmental quality.

The Fundamental Balance

Model: The elements shown are parts of economic system

Producers (Take inputs convert them to outputs) Consumers (Receivers of final goods and services)

Producers

Consumers

Raw Materials (M)

Goods

(G)

Recycled (RPr)

Residuals (RP)

Recycled (Rcr)

Residuals (RC)

Discharged (RPd)

Discharged (RCd)

Natural Environment

The Fundamental Balance

Producers and consumers create residuals (leftovers) – Waste energy, pesticides, animal manure, sulfur dioxide, carbon dioxide, toxic solvents, the list goes on

Producers

Consumers

Raw Materials (M)

Goods

(G)

Recycled (RPr)

Residuals (RP)

Recycled (Rcr)

Residuals (RC)

Discharged (RPd)

Discharged (RCd)

Natural Environment

In the long run, M = RPd + RC

d

When system grows, it can retain some proportion of natural inputs (such as capital accumulation)

Recycling delays disposal of residuals The fundamental balance is achieved in

the long run only and to reduce the residual amount, the M has to be reduced

According to the flow diagram:RP

d + RCd = M = G + RP – RC

r – RPr

Reduce G, reduce RP and/or Increase RCr +

RPr

Reduce GReduce output or at least stopping its rate of

growth, for example, ZPG Stationary population can increase economically Even stationary population can gradually degrade

the environment in which it finds itself

Reduce RPFor a given output produced, reduce the

residuals Shift the intensity of production in every sector by

adopting new environment friendly technologies and practices

Shift composition of output sector wise Step towards Services sector, or Information

sector..?

Increase RCr + RP

r

Substituting recycled material for virgin materials However,

It is difficult to recycle every residual Process of energy conversion changes the chemical

structure of energy materials Recycling still will create residuals Role of materials research

The environment as an economic and social asset The productivity of natural environment lies in its

ability to support and enrich human life and to assimilate and assemble less harmful the waste products of economic system. The environment quality is directly affected by the types and amounts of residuals

PPC: A curve simply showing the different combinations of

two things a society may produce at any time, given its resources and technological capabilities

Market Goods

Environmental Quality (Index, derived from data on different dimensions of ambient environment – such as SO2, noise levels, etc

Terminology: Ambient Quality Environmental Quality (includes visual and aesthetic

quality of the environment) Residuals (production and consumption) Emissions (portion of residuals placed in the

environment) Recycling (residuals that could be used again in the

production process) Pollutant (A substance lowering ambient quality level) Effluent (Water Pollutant) Pollution (Lower ambient quality to the extent that

causes damages to the environment) Damages (Negative impact produced by pollution) Environmental Medium (classified as land, air, water) Source (location at which emissions occur)

Emissions, Ambient Quality and DamagesSource n

Production

Residuals

Residual handling

Emissions

Land Water Air

Physical, chemical and hydrological processes Ambient quality Human and nonhuman exposure Human and ecosystem damages

Environmental Media

Types of pollutantsCumulative and Noncumulative Pollutants

Cumulative (Radioactive waste (cosmic rays), plastic waste)

Noncumulative (Noise) Organic matter emitted into water bodies,

noncumulative (water has assimilative capacity rendering effluents as much more benign) and cumulative if rate of breaking down into less harmful chemicals is low

Basic problem is figuring out environmental damage and lessening the emissions

Cause-and-effect relationship between current emissions, current ambient quality and current damages

Local vs. Regional and Global Pollutants Local: Visual degradation, noise pollution Look at how widespread the effects are from any

particular pollution source Regional: Acid Rain and Global: Ozone layer

depletion Solutions… (emissions and impacts)?

Point Source vs. Nonpoint Source Pollutants Point: SO2 from a large power plant are easier to

locate Non point: Agriculture chemicals (and storm water)

usually run off land in a diffused pattern Emissions and impact easier to judge for…?

Continuous vs. Episodic EmissionsContinuous: Emissions from electric power

plant. Policy focus on rates of dischargesDoes continuous emissions mean continuous

damage to environmental quality?Episodic: Accidental chemical spills.Could be dangerous or could be ignored

Environmental damages not related to emissions!Apt policies still needed

Short Run and Long Run ChoicesPPC Analysis

Therefore, sustainability is an important issue.

Market Goods

Environmental Quality

Market Goods

Environmental Quality

Due to depletion of resources…