Environmental economics

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Environmental economics is a subfield of economics concerned with environmental issues (other usages of the term are not uncommon). In using standard methods of neo-classical economics, it is distinguished from green economics or ecological economics which include the nonstandard approaches to environmental problems, environmental science/environmental studies, or ecology. Quoting from the National Bureau of Economic Research Environmental Economics program:

“ [...] 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.[1] ”

A related field (or possibly alternative approach to the same field) is ecological economics, which takes as its premise that economics is itself a strict subfield of ecology.

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[edit] Topics and concepts

Central to environmental economics is the concept of an externality. This means that some effects of an activity are not taken into account in its price. For instance, pollution in excess of the socially "optimal" level may occur if the prices a producer pays do not include the impacts (costs) experienced by those adversely affected. One frequently-noted example of an externality is Garrett Hardin's Tragedy of the Commons, which occurs in connection to public goods (goods that are "non-excludable" and "rival" - that is, they are open to all, but potentially exhaustible). Visitors to an open-access recreational area will use the resource more than if they had to pay for it, leading to environmental degradation. This of course assumes that there is no other policy instrument (for example, permits, regulation) being used to control access.

In economic terminology, these are examples of market failures, and that is an outcome which is not efficient in an economic sense. Here the inefficiency is caused because too much of the polluting activity will be carried out, as the polluter will not take the interests of those adversely affected by the pollution into account. This has led to controversial research into measuring well-being which tries to measure when pollution is actually starting to affect human health and general quality of life.

[edit] Solutions

Solutions advocated to correct such externalities include:

  • Better defined property rights. The Coase Theorem states that assigning property rights will lead to an optimal solution, regardless of who receives them, if transaction costs are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if government itself did not act (an early example of bioregional democracy). Many markets for "pollution rights" have been created in the late twentieth century -- see emissions trading. The assertion that defining property rights is a solution is controversial within the field of environmental economics and environmental law and policy more broadly; in Anglo-American and many other legal systems, one has the right to carry out any action unless the law expressly proscribes it. Thus property rights are already assigned (the factory that is polluting has a right to pollute).
  • Taxes and tariffs on pollution/Removal of "dirty subsidies". Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive", that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. Some advocate a major shift from taxation from income and sales taxes to tax on pollution - the so-called "green tax shift".
  • Quotas on pollution. Often it is advocated that pollution reductions should be achieved by way of 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. In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program, though interest in its application is spreading to other environmental problems.
  • Environmental regulations. Here 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. Some firms, in this system, can abate inexpensively, while others can only abate at high cost. Because of this, the total abatement has some expensive and some inexpensive efforts to abate. Environmental economic regulations find the cheapest emission abatement efforts first, then the more expensive methods second. E.g. as said earlier, trading, in the quota system, means a firm only abates 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.

[edit] Alternative approaches to environmental economics

All of the above are advocated by the specific theory of Natural Capitalism (Hawken, Lovins, Lovins). The book goes further by envisioning a world where natural services are considered on par with physical capital.

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 which 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.

Environmental economics was once distinct from resource economics but is now hard to distinguish as a separate field as the two became associated with sustainability and more radical green economists split off to work on an alternate political economy.

Environmental economics was a major influence for the theories of natural capitalism and environmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the value of biodiversity to humans, respectively.

The more radical Green economists reject neoclassical economics in favour of a new political economy beyond capitalism or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson.

These more radical approaches would imply changes to money supply and likely also a bioregional democracy so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism.

Accordingly, there is still a need for a more conservative environmental economics, and its subfields environmental finance, Natural Capitalism, measuring well-being and sustainable development.

[edit] See also

[edit] Prominent Environmental Economic Hypotheses and Theorems

[edit] References

  • Allen K. Kneese and Clifford S. Russell (1987). "environmental economics," The New Palgrave: A Dictionary of Economics, v. 2, pp. 159-64.

[edit] References

  1. ^ Environmental Economics. NBER Working Group Descriptions. National Bureau of Economic Research. Retrieved on July 23, 2006.
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