Macroeconomics, International Economics, & Green Accounting

1. Macroeconomics, International Economics, & Green Accounting How can macroeconomic & int’l policy affect the environment?

2. The income effect • Recall theory: Income is an argument of demand • If consumption of a good: • Increases with increased Y, normal good • Decreases with increased Y, inferior good • Recall Environmental Kuznet’s curve • Pollution is first (+) correlated with income, then (-) correlated.

3. Individual to societal demand • How translate individual demands into societal demand and government policy? • Aggregate individual demands, translate into government demand • Think of environmental quality as a public good • Level of provision depends on form of government. • Democracy more likely to provide public goods? • What is “supply of environmental quality”? • What is “demand for environmental quality”?

4. Demand and supply for environmental quality • Demand: value to consumers • How consumers value (are willing to pay for) things like clean air, clean water, biodiversity, ecosystem services, (non)-use values. • Supply: cost to provide • Richer economies have larger industrial base, increasing MC of providing environmental quality (not necessarily)

5. Interaction of supply and demand • Both supply and demand may shift when incomes in a country increase. $ Drawn this way, environmental quality increases with increased Y. S1 S0 D1 D0 Q0 Q1 Environmental Quality

6. But environmental quality may  S1 $ Drawn this way, environmental quality decreases with  Y. S0 D1 D0 Environmental Quality Q1 Q0

7. Safe water vs. income Regression analysis on 86 Countries from around the world Shows improvement in drinking Water quality with  Y. % w/o safe water Income

8. Why are we studying this? • How to improve environmental quality in poor countries? • Could focus international effort on protecting resources, improving environment directly • If we believe Kuznet’s curve, could focus attention on increasing incomes of poor people, who will then demand increased environmental quality. • Insufficient data to be certain about outcome.

9. Transboundary pollution • Pollution that migrates beyond jurisdiction of source. • GHGs, SO2 (acid rain), water pollution, some biodiversity loss, exotic species. • Possible policy instruments • Tariffs, standards for cleanliness, international environmental agreements, non-targeted international agreements.

10. Green national accounting • Measures of national income: GNP, GDP • Don’t account for environmental degradation and resource depletion • Can give misleading measure of national “well-being”, may lead to wrong policy. • Many adjustments have been proposed to “correct” standard measures.

11. “Natural capital” depreciation • Natural capital: the available endowment of land and natural resources • Measure depletion of natural resources (oil, timber, minerals, soils) • Subtract from standard measures • Result: many developing nations show substantial effect

12. Indonesia example: “Adjusted Net Domestic Product”

13. Pollution control & cleanup • How should pollution control and cleanup costs be accounted for in developed nations? • Should cleanup expenditures contribute to GNP? Some think not. • Main issue: don’t double count. These are legitimate expenditures in order to maintain environmental values.

14. How are national accounts used? • Primary use: assist policy makers in government. • E.g. Gov’t expenditures on scientific research are linked to current economic performance and climate. • United Nations has proposed a “System of Environmental and Economic Accounting”, some adjustments underway.

15. Paying for public goods • Public goods will be under-provided, externalities will not be internalized in free market. • Government intervention: tax revenues can pay for cleanup, regulation, public goods provision • But many taxes “distortionary” • E.g. Income tax discourages work! • Costs $1.40 to raise $1 in revenue

16. Double dividend • If we substitute distortionary taxes with pollution taxes, we may earn a “double dividend” • Reduce pollution (and therefore damage from pollution) • Reduce distortionary taxes on labor and thus the DWL from those taxes • This is called the “revenue recycling effect”

17. A 3rd effect of pollution taxes • “Tax interaction effect” • Polluting good and leisure are substitutes • Tax pollution, demand for leisure shifts out • If labor is still taxed, shift introduces an additional DWL attributed to  pollution • Decreases social welfare. • Overall size of tax interaction effect varies among polluting industries • Estimate: pollution tax should be set at 63% of marginal damage.