What is Environmental Economics?

1. What is Environmental Economics? Chapter 1 - BCF

2. What is Economics? • In any economy there are competing objectives • The 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.

3. 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

4. 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

5. 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 pollute • Commumist regimes v/s capital economy • Therefore, any system will produce environmental damage if the incentives within the system are not structured to avoid them

6. 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 dimension • Can we enforce certain policies? • Are we targeting right environmental objectives? • So, it is the way the economic system has been arranged!

7. 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

8. Incentives In Industries • Problems: • 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…?

9. Incentives in Transportation: • Widespread use of automobile and its ownership • Detrimental to human health and environmental damage • Environmental Economists have termed the word, External costs in order to describe a certain set of costs • Some countries have proposed establishing road charges on drivers to recognize the external costs • Design of Environmental Policy

10. 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)

11. Revolved around three air pollution problems: • Urban smog • Emissions of SO2 • Other toxic chemical emissions • The law included things like: • New technologies • Production of super clean cars • New standards for toxic emissions

12. 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

13. 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…?

14. 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

15. Benefit Cost Analysis: • Main analytical tool used by economists to evaluate environmental decisions. • Used widely in public sector • An aid in selecting efficient policies, agency uses it to justify it’s workings • Used 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

16. International Issues: • Destruction of Ozone layer • Global 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

17. 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.

18. The Economy and the Environment Chapter 2 – BCF

19. 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 Raw Materials (Inputs, Natural Resource Economics) Residuals, (Environmental Economics) Economy

20. 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

21. 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?

22. 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 energy • Nonrenewable 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

23. Biological and ecological processes create connections between present and future generations. • Sustainability: choosing rates of use today so that they don’t jeopardize future generations • How can it be defined for renewable and nonrenewable resources…? • Depletion of earth’s assimilative capacity. • Example: CO2,, heavy metals

24. 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 resources • Resource extraction directly affects environmental quality.

25. Raw Materials (M) Recycled (RPr) Residuals (RP) Discharged (RPd) Producers • 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) Goods (G) Residuals (RC) Consumers Discharged (RCd) Recycled (Rcr) Natural Environment

26. Raw Materials (M) Recycled (RPr) Residuals (RP) Discharged (RPd) Producers • The Fundamental Balance • Producers and consumers create residuals (leftovers) – Waste energy, pesticides, animal manure, sulfur dioxide, carbon dioxide, toxic solvents, the list goes on Goods (G) Residuals (RC) Consumers Discharged (RCd) Recycled (Rcr) Natural Environment

27. In the long run, M = RPd + RCd • 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: • RPd + RCd = M = G + RP – RCr – RPr • Reduce G, reduce RP and/or Increase RCr + RPr

28. Reduce G • Reduce 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 RP • For 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..?

29. Increase RCr + RPr • 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

30. 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

31. 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)

32. Source n Production • Emissions, Ambient Quality and Damages Residuals Residual handling Emissions Environmental Media Water Air Land Physical, chemical and hydrological processes Ambient quality Human and nonhuman exposure Human and ecosystem damages

33. Types of pollutants • Cumulative 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

34. 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…?

35. Continuous vs. Episodic Emissions • Continuous: Emissions from electric power plant. • Policy focus on rates of discharges • Does 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

36. Due to depletion of resources… • Short Run and Long Run Choices • PPC Analysis • Therefore, sustainability is an important issue. Market Goods Market Goods Environmental Quality Environmental Quality