Chapter 5 Environmental Economics and Environmental Policy

1. Chapter 5 Environmental Economics and Environmental Policy

2. This lecture will help you understand: Economic theory Economic growth and health, and sustainability Environmental and ecological economics U.S. and international environmental policy The environmental policy process Science and policy

3. Central Case Study: San Diego and Tijuana Rain washes pollutants into Mexico’s Tijuana River Then onto U.S and Mexican beaches A new sewage treatment facility reached capacity In 3 years Poor Mexicans suffer most Contaminated water, disease, industrial waste

4. Economics • People say protection threatens economic growth • But environmental protection is good for the economy • Economics studies how people use resources to provide goods and services in the face of demand • Environmental problems are also economic problems • Ecology and economics come from oikos (household) • Economy: a social system that converts resources into: • Goods: manufactured materials that are bought, and • Services: work done for others as a form of business

5. Types of modern economies Subsistence economy: people get their daily needs directly from nature or their own production They do not purchase or trade products Capitalist market economy: buyers and sellers interact to determine prices and production of goods and services Centrally planned economy: the government determines how to allocate resources Mixed economy: governments intervene in the market

6. Governments intervene in a market economy In mixed market economies, governments intervene to: Eliminate unfair advantages held by single buyers or sellers Provide social services (national defense, medical care, education) Provide safety nets for elderly, disaster victims, etc. Manage the commons Reduce pollution and other threats to health and quality of life

7. The economy relies on the environment • Economies receive inputs (resources) • Process them • Discharge outputs (waste) • Traditional economics ignores the environment • But still drives most policy decisions

8. Environmental view of economics Human economies are subsets of the environment and depend crucially on it for goods and services

9. Environmental systems support economies Economic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods” Ecosystem services: essential services support the life that makes economic activities possible * Soil formation * Pollination * Water purification * Nutrient cycling * Climate regulation * Waste recycling

10. Economic activities affect the environment • 15 of 24 global ecosystem services are being degraded or used unsustainably • Resource depletion and generating pollution reduces the functioning of ecological systems • Degradation of ecosystem services disrupts economies • Pollution depresses economic opportunities • Ecological degradation hurts poor people the most • Restoring ecosystem services is a prime way to alleviate poverty

11. Adam Smith’s “invisible hand” Adam Smith believed that self-interested behavior could benefit society If laws were followed and markets were competitive Classical economics: when people pursue economic self-interest in a competitive marketplace … The market is guided by an “invisible hand” and … Society benefits This idea is a pillar of free-market thought today

12. Neoclassical economics includes psychology Neoclassical economics examines the psychological factors that underlie consumer choices Market prices reflect consumer preference Supply vs. demand Conflict between buyers and sellers leads to …. Production of the “right” quantities of a product

13. Cost-benefit analysis: evaluating decisions • Cost-benefit analysis: costs of a proposed action are compared to benefits that result from the action • If benefits > costs: pursue the action • But not all costs and benefits can be easily identified, defined, or quantified • It is easy to quantify the cost of pollution-reducing equipment or jobs created by an activity • But hard to assess the effects of pollution on health • Monetary benefits are overrepresented • Analysis is biased in favor of economic development • Biased against environmental protection

14. Neoclassical economics hurts the environment Capitalist market systems operate according to neoclassical economics Enormous material wealth has been created Assumptions of neoclassical economics contribute to environmental degradation: Resources are infinite or substitutable We should discount the future All costs and benefits are internal All growth is good

15. Assumption: resources are infinite Economic models treat resources and workers as infinite, substitutable, and interchangeable Once used up, a replacement resource will be found Some resources can be replaced but some cannot Nonrenewable resources (fossil fuels) can be depleted Renewable resources (forests) can also be used up

16. Assumption: discount long-term effects • A future event has less value than a present one • Future events are discounted: • Short-term costs and benefits are more important than long-term costs and benefits • Present conditions are more important than future ones • We ignore the long-term consequences of policy decisions • Environmental problems unfold gradually • Discounting causes us to downplay environmental impacts of pollution and resource degradation

17. Assumption: costs and benefits are internal • Only the buyer and seller experience costs and benefits associated with exchanging goods or services • Pricing ignores social, environmental, or economic costs of pollution and degradation • Taxpayers bear the burden of paying these costs • External costs: affect people other than buyers or sellers • Health problems, resource depletion, property damage • Ignoring external costs creates a false impression of the consequences of choices • Laws and regulations address external costs

18. People suffer from external costs People who do not participate in a transaction suffer from external costs (health problems, property and aesthetic damage, stress, lower real estate values)

19. Assumption: all growth is good • Economic growth is needed to keep jobs and social order • It creates opportunities for poor to become wealthier • Progress is measured by economic growth • But economic growth does not ensure well-being • Affluenza: material goods do not always bring contentment to those who can afford them • Runaway growth can destroy our economic system • Resources are ultimately limited

20. We live in a growth-oriented economy • Modern global economic growth is unprecedented • Americans are in a frenzy of consumption • Economic growth comes from: • Increased inputs (labor, natural resources) • Economic development: improved efficiency of production (technology, ideas, equipment) • Uncontrolled economic growth is unsustainable • Technology can push back limits, but not forever • Resources are finite or have limited rates of extraction

21. Is the growth paradigm good for us? The dramatic rise in per-person consumption has severe environmental consequences

22. Ecological economics Ecological economics: civilizations cannot overcome environmental limitations Uses principles of ecology and systems science Natural systems are models for sustainability Calls for revolution Ecological economists advocate steady-state economies: Economies thatmirror natural ecological systems They don’t grow nor shrink but stay stable Quality of life increases through technological and behavioral changes

23. Environmental economics • Environmental economics: unsustainable economies have high population growth and inefficient resource use • We can attain sustainability within current economic systems • Calls for reform • Economies grow by modifying neoclassical economics to increase efficiency through technology • Environmental economists assign monetary values to ecosystem goods and services • Integrating them into traditional cost-benefit analysis

24. Valuing ecosystem goods and services The market ignores/undervalues ecosystem services Nonmarket values: values (e.g., ecological, cultural, spiritual) not included in the price of a good or service Hard to quantify, since there is no traditional measure of economic worth • Natural cycles are vital to our existence but markets impose no penalties when we disturb them

25. How do we quantify an ecosystem’s value? Surveys determine how much people are willing to pay to protect or restore a resource Measure the money, time, or effort expended to travel to parks for recreation Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet Measure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution

26. The global value of ecosystem services Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming • The global economic value of 17 ecosystem services equals $46 trillion • More than the GDP of all nations combined

27. Businesses are responding to concerns Industries, businesses, and corporations make money by “greening” their operations Recycling, cutting energy use, etc., reduces costs, and increases profits Greenwashing: consumers are misled into thinking companies are acting more sustainably than they are Example: “Pure” bottled water may not be safer or better People must support sustainable economics

28. Markets can fail Market failure occurs when markets ignore: The environment’s positive impacts on economies (ecosystem services) The negative effects of activities on the environment or people (external costs) Government intervention counters market failure through: Laws and regulations Taxing harmful activities Designing economic incentives to promote fairness, conservation, and sustainability

29. Environmental policy Once society agrees that a problem exists, it may persuade its leaders to solve it through policy Policy: a formal set of general plans and principles to address problems and guide decision making Public policy: governmental laws, regulations, orders, incentives, and practices to advance societal welfare Environmental policy: pertains to human interactions with the environment Regulates resource use or reduces pollution To promote human welfare and/or protect resources

30. Policy impacts environmental problems Science, ethics, and economics help formulate policy Science: provides information and analysis Ethics and economics: clarify how society can address problems Government interacts with Citizens, organizations, and the private sector

31. Policies prevent the tragedy of the commons • Capitalist markets are driven by short-term profit • Not long-term social or environmental stability • Little incentive to minimize impacts • Market failure justifies government intervention • Environmental policy tries to protect environmental quality and natural resources • While promoting equity or fairness in resource use • Tragedy of the commons: commonly held resources will become overused and degraded • Best prevented by restriction of use and management

32. Environmental policies prevent free riders and external costs Free riders: people are tempted to cheat and not participate in sacrificing to protect the environment An entity gets a “free ride” by avoiding sacrifices made by others Private voluntary efforts are less effective than public policies, where everyone sacrifices Environmental policies also promote fairness by eliminating external costs Policies ensure that parties do not use resources in ways that harm others

33. The U.S. is a good model to understand environmental policy It has pioneered innovative policies Its policies serve as models for other countries Understanding federal policy helps us understand it at local, state, and international levels Congress passes legislation (statutory law) It is signed into law by the president Laws are implemented and executed by agencies Regulations: specific rules to achieve objectives of broadly written statutory laws Framework of U.S. environmental policy

34. State and local governmental policies The structure of the federal government is mirrored at the state level But state laws cannot violate principles of the U.S. Constitution If laws conflict, federal laws take precedence California, New York, New Jersey, and Massachusetts have strong environmental laws Well-funded agencies Citizens value protecting the environment

35. Early U.S. environmental policy From 1780s to the late 1800s, laws promoted settlement and extraction of resources General Land Ordinances of 1785 and 1787: encouraged people to move west The federal government managed unsettled lands Surveying and readying them for sale Settlement increased prosperity for citizens Relieved crowding in eastern cities Displaced millions of Native Americans People believed the land was infinite and inexhaustible

36. Typical laws from the 1780s to late 1800s • Homestead Act (1862): anyone could buy or settle on 160 acres of public land Insert Fig. 5.10a

37. Typical laws from the 1780s to late 1800s • General Mining Act (1872): people could mine on public land for $5/acre with no government oversight

38. Typical laws from the 1780s to late 1800s • Timber Culture Act (1873): encouraged the timber industry to clear-cut ancient trees with little government policy to limit logging or encourage conservation

39. The second wave of U.S. policy Public perception and government policy shifted Laws addressed problems caused by westward expansion and encouraged conservation Congress created Yellowstone National Park, the world’s first national park, in 1872 Also, national parks, forests, and wildlife refuges Understood that the nation’s resources were exhaustible They required legal protection Land management policies addressed soil conservation The 1964 Wilderness Act preserves pristine land

40. The third wave of U.S. environmental policy In the 20th century, people were better off economically But lived with dirtier air, dirtier water, and more waste and toxic chemicals Events increased awareness of environmental problems and shifted public priorities and policies Rachel Carson’s Silent Spring (1962) described the ecological and health effects of pesticides and chemicals

41. Modern U.S. environmental policy Ohio’s Cuyahoga River was so polluted that it caught fire in the 1950s and 1960s The public demanded more environmental protection Today, U.S. health is better protected and the air and water are cleaner mainly because of policies of the 1960s

42. The National Environmental Policy Act (1970) NEPA began the modern era of environmental policy It created the Council on Environmental Quality Requires an Environmental Impact Statement (EIS) For any federal action that might significantly impact the environment To assess the environmental impacts of any federally-funded project An EIS usually does not halt projects Provides incentives to decrease damage Grants citizens input into the policy process

43. The EPA shifts environmental policy In 1970, President Nixon’s executive order created the Environmental Protection Agency (EPA) To develop an integrated approach to environmental policy The EPA: Conducts and evaluates research Monitors environmental quality Sets and enforces standards for pollution levels Assists states in meeting standards and goals Educates the public

44. Significant environmental laws The public demanded a cleaner environment Environmental problems needed tough regulations Thousands of laws protect health and environmental quality in the U.S.

45. Environmental policy changes over time Major advances in environmental policy in the 1960s and 1970s occurred because: Strong evidence of environmental problems existed People could visualize policies to deal with problems The political climate was ripe, with a supportive public and leaders who were willing to act Pictures of Earth from space made us aware that our planet was finite

46. Many reacted against regulation By 1990, many felt that regulations were too strict Imposed economic burdens on people and businesses George W. Bush and the Republican-controlled Congresses (1994–2006) tried to weaken laws “The Death of Environmentalism” (2004): the environmental movement has to be reinvented It must appeal to core values with an inspiring vision This new outlook helped elect President Obama in 2008

47. Current environmental policy Climate change dominates discussion on environmental policy • Other nations have increased attention to issues • The 1992 Earth Summit in Rio de Janeiro, Brazil • The 2002 World Summit on Sustainable Development in Johannesburg, South Africa • This wave of policy focuses on sustainability • Safeguarding ecosystems while raising living standards

48. International environmental policy International law is vital to solving transboundary issues Customary law: international law arising from long-standing practices or customs held by most cultures Conventional law:arises fromconventions or treaties Montreal Protocol (1987): 160 nations agreed to reduce ozone-depleting chemicals Kyoto Protocol: reduces greenhouse gas emissions causing climate change North American Free Trade Agreement (NAFTA): Addresses U.S.–Mexico issues

49. Organizations shape international policy • International organizations influence nations through: • Funding, economic or political pressure, and media attention • United Nations (UN): plays an active role in policy • Sponsors conferences, coordinates treaties, publishes research • UNEP (United Nations Environment Programme) promotes sustainability • Research, outreach activities • Provides information to policymakers and scientists

50. The World Bank and European Union The World Bank: one of the largest funding sources for economic development in poor countries Dams, irrigation, infrastructure, etc. Funds unsustainable, environmentally damaging projects The European Union(EU) seeks to promote Europe’s unity and its economic and social progress Can sign binding treaties and enact regulations Sees environmental regulations as barriers to trade