ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS UNIT

(ES30032/ES50059)

LECTURE 1
Environmental Problems, Ethics And Economics

Dr Alistair Hunt: [email protected]

06.02.2024
LECTURE 1 OUTLINE

• Introductions/Organisation
• Outline of module contents
• Relationship with EANRE 1

• Ethics & Environmental Economics

• Efficiency
• Equity
 Organisation Of Unit

• Lectures will be given by me, Alistair Hunt – [email protected]

• Lecture notes will be uploaded on Moodle before the lecture
• All relevant information about the course is on Moodle under “General
Information”
• Some supporting literature has been and will be uploaded on Moodle
• References will be mentioned during the lecture
• It is expected that students do further reading
• The core text is Perman et al., 4th Edition – it is on Moodle
• Lecture recordings will be posted on Moodle
 COURSE CONTENT: OVERVIEW

• This course is self-contained, though there will be some iteration of

material from ES30031
• The technical level is not too high; more emphasis is placed on really
understanding basic concepts, and being able to take a broad overview of
the subject
• The course outline, with an overview of the course contents, is uploaded
on Moodle under “General Information”
 CONTENT: TOPICS (WEEK-BY-WEEK)
Lecture date Topic
February 6th 2024 The Environment, Economics and Ethics
February 13th 2024 Macro-economic foundations: Economy-environment linkages

February 20th 2024 Economic Management of Non-renewable resources

February 27th 2024 Economic Management of Renewable resources
March 5th 2024 Non-market methods for valuing the environment
March 12th 2024 Non-market valuation - case studies
March 19th 2024 Economics of Biodiversity
March 26th 2024 Climate Change – Adaptation & Mitigation
April 16th 2024 Behavioural aspects of environmental economics
Trade, Economic Growth and the Environment
April 23th 2024 Assessment Support
April 30th 2024 Assessment Support

Seminars
Two - Weeks 23 & 26 - dates to be confirmed
 MODULE ASSESSMENT

• ES30032 & ES50059: Coursework.

• Policy Brief (Choice; 3 out of 6 topics – 1200 words each).
• Date released: 12pm March 28th 2024
• Final date of submission: 12pm May 6th 2024 through Moodle

•
SOME USEFUL DEFINITIONS

• Environment: the surroundings or conditions in which a person,

animal, or plant lives or operates

• Ecosystem: a community or group of living organisms that live in

and interact with each other in a specific environment e.g.
tropical forest

• Environmental Economics: Utilisation of economic principles in

the management of the environment and its natural resources
DEATHS ATTRIBUTABLE TO ENVIRONMENTAL RISKS
Percentage of Total Deaths - Attribution to Environmental Hazards
Lower & Middle High
Risk Income Countries Income World

Indoor Smoke from Solid Fuels 3.9 0 3.3

Unsafe water, sanitation, hygiene 3.8 0.1 3.2

Urban outdoor air pollution 1.9 2.5 2

Global climate change 0.3 0 0.2

Lead exposure 0.3 0 0.2

Source: EEA (2017)

Total Risks 9.6 2.6 8.7
LOST ECONOMIC OUTPUT AS PROPORTION OF GDP
FROM DEATHS FROM POLLUTION

Traditional Pollution: Unsafe water,

sanitation & handwashing; indoor air
pollution from solid fuels

Modern Pollution: Air pollution (PM,

Ozone); lead exposure
 Challenges of Environmental Economics

PMB: Private Marginal Benefit

PMC: Private Marginal Cost; SMC: Social Marginal Cost
P: price; Q: quantity of consumption
 THEMES OF MODULE

• Allocative Efficiency – Non-wasteful use of economic resources

• Optimality – Resource use allocation desirable from society’s point of view

• Sustainability – taking care of posterity – a moral requirement

CONTENT OF COURSE
 Lecture topics Twenty Key Challenges
1. The Environment, Economics and Ethics Equitable use of the environment
2. Macro-economic foundations: Economy- Disruptive development and path dependencies
environment linkages Population development and use of the environment
Urbanisation as a key for environmental development
Sustainable perspective on digitalisation

3. Economic Management of Non-renewable Conflicts over natural resources

resources Land use & soil degradation
4. Economic Management of Renewable
resources
5. Non-market methods for valuing the Quantitative analysis of environmental use
environment
6. Non-market valuation - case studies Health and epidemiological environment
7. Economics of Biodiversity Dynamics of the economic-ecological system
Loss of biodiversity and natural capital
Valuing and paying for ecosystem services
8. Behavioural aspects of environmental Behavioural environmental economics
economics
9. Trade, Economic Growth and the Institutional analysis of environmental policy
Environment
10. Climate Change – Risks and Adaptation Risk, uncertainty and resilience
Environmental migration
11. Climate Change – Greenhouse Gas Reduction Deep carbonisation and climate neutrality
(Mitigation) Carbon exposure and green finance
Energy system transformation
Structural assessment modelling and modelling
CONTEXT: POLICY APPLICATIONS: UK DEFRA
Defra Objectives:
1. Improve the environment through cleaner air and water, minimised waste, and
thriving plants and terrestrial and marine wildlife

2. Reduce greenhouse gas emissions and increase carbon storage in the agricultural,
waste, peat and tree planting sectors to help deliver net zero.

3. Reduce the likelihood and impact of flooding and coastal erosion on people,
businesses, communities and the environment.

4. Increase the sustainability, productivity and resilience of the agriculture, fishing,

food and drink sectors, enhance biosecurity at the border and raise animal welfare
standards.

Economics: Applies economic efficiency, cost-effectiveness, distributional and sustainability

criteria to achieving these objectives
 POLICY APPLICATIONS: EU

https://ec.europa.eu/environment/enveco/economics_policy/index.htm
• Links between production, the environment and environmental policy

• Environmental potential of the collaborative economy

POLICY APPLICATIONS: EU
ECONOMY AND FINANCE - EUROPEAN COMMISSION (EUROPA.EU)

• Sustainable Finance
• Beyond GDP
• Phasing out Environmentally Harmful Subsidies
• Ensuring that polluters pay - toolkit
• Green Public Procurement
• Costs of environmental legislation for selected industries over time
• Influences on consumer behaviour: Policy implications beyond nudging
POLICY APPLICATIONS: UNITED NATIONS
HISTORY OF ENVIRONMENTAL ECONOMICS IN 1 SLIDE!

• Classical view:
• Land limited in supply
• Input to (ag) production subject to diminishing returns – Malthusian steady-
state subsistence
• JS Mill recognised
• role of technological advance
• Land as source of amenity

• Neo-classical:
• Values determined by supply & demand
• Recognition of market failures e.g. Pigouvian externalities (1920) – welfare
economics
• Production functions include natural resources from 1970s
• Ecological Economics
• Economic system seen as a subsystem of larger system, i.e. planet Earth
ETHICS, ECONOMICS AND THE ENVIRONMENT

How should we think about the trade-offs we make with regard

to the environment? Rules of conduct include:
• Naturalist moral philosophies
• Libertarian moral philosophy
• Utilitarianism

And God said, Let us make man in our image, after our likeness: and let them have
dominion over the fish of the sea, and over the fowl of the air, and over the cattle, and
over all the earth, and over every creeping thing that creepeth upon the earth. Verse 26,
Book of Genesis, The Bible, King James Translation.
Philosophical dispute: ‘dominion over’ may be better as ‘stewardship of’?
 WHY CONSIDER ETHICS?

The question ‘What will happen to petrol consumption if the tax on it is increased by
x%?’ is a question for positive economics. It does not entail any ethical considerations.
The question ‘Should the tax on petrol be increased?’ is a question for normative, or
welfare, economics. It can only be answered using ethical criteria.

Environmental and resource economics often relates to questions of the ‘should’ type –
e.g. the appropriate level of environmental protection

The ethical criteria that welfare economics uses are Utilitarian → useful to question
these criteria
 NATURALIST MORAL PHILOSOPHIES

Naturalist ethical systems treat non-human entities as morally considerable

→ values do not derive exclusively from humans.
→ Action not right if significant disturbance to ecosystem

Two broad classes of ethical system:

1.Consequentialist systems judge actions by the consequences that follow from them
2.Deontological systems judge actions by whether they fulfil obligations

Can arrive at naturalist position from either system:

1. By extending beyond humans the entities for whom consequences count (Singer 1993)
2. By extending beyond humans the entities to whom obligations are owed (Watson 1979)
 LIBERTARIAN MORAL PHILOSOPHY

Libertarianism: humanist ethical system.

- individual human rights are inviolable. Rights attach only to individual
humans.

Libertarianism implies limited role for government, e.g. maintaining

institutions required to support free contracting and exchange.
Income and wealth redistribution from rich to poor only if everybody agrees
to it, otherwise coercive and unjust.
 UTILITARIANISM

Utilitarianism is a consequentialist moral philosophy.

→ consequences of an action determine its moral worth.
So, ends may justify the means, as with a lie that saves a life.
Application of utilitarianism requires the definition of the set of entities for whom
consequences are to be considered. Humans only? Or all sentient beings?
Utilitarianism that underpins welfare economics is anthropocentric
→ economic outcomes should reflect consumer preferences.
Social welfare is some aggregation of individuals’ utilities.
But, consequences for non-human entities will be relevant if humans affected by
them.
- Humans value non-humans
- Humans use non-humans as renewable resource
UTILITARIANISM: CARDINAL AND ORDINAL UTILITY FUNCTIONS

For an individual a utility function maps states of the world into a single number for
utility
U = U(X1, X2,....Xi,...XN)
Aggregation over individuals requires that U’s are cardinal numbers (e.g. weight, height,
distance, money). Cardinality makes interpersonal comparison possible.
The standard propositions of demand theory can be derived from ordinal utility
functions → difficult to assume cardinality and admit interpersonal comparisons.

If cardinality is assumed, aggregation can use a social welfare function.

A Social Welfare Function captures ethical objectives of the society.
 CRITICISM OF PREFERENCE-BASED UTILITARIANISM

Utilitarianism: individuals are the best judge of what is good/bad for them
→ individuals’ preferences indicate what is good for individuals.

But
1. is it reasonable to assume that individuals generally have enough information to assess the
implications for their utility of the alternatives open to them?
2. People are dualistic (Sen (1987))
- concerned with satisfaction of their own preferences and pursuing objectives which are not
exclusively self-interested.
Altruism as ‘sympathy’ and ‘commitment’.
- Sympathy: if a change improves the lot of relevant other(s), my utility increases.
- Commitment: my concern based on my ethical principles → I may approve of change that reduces
my utility. Individuals exist as both consumers and citizens.
EVALUATING ECONOMIC RATIONALE

Hobson (2004) 30:3

CBA of recycling focus syndrome: proportion
on a) resource of people expressing
scarcities; preferences for
b) WTP of non- sustainable
market values (e.g. consumption (30%)
time) - neglect issue of compared to market
moral motivation share of green
products (3%)

Monetary incentives Monetary incentives

can crowd out intrinsic can crowd in intrinsic
motivation if perceived motivation if perceived
to be controlling to be acknowledging
CONSUMER – CITIZEN CONFLICT: EVIDENCE
Sweden environmental policy –
incentive-based →test whether
appropriate

• 320 Swedish households surveyed

• Rated on 9-point scale the degree to
which 20 indicator values functioned as
guiding principles in their life

• Aggregate according to whether self-

enhancement or self-transcendence
dominates

• Surveyed re recycling motives

CONSUMER – CITIZEN CONFLICT: EVIDENCE
Household recycling motives

• Strongest motives: Self-

transcendence
• Moral obligation
• Kantian – do what I want others to do

• State role & economics: Self-

enhancement

→ Policy reliance on incentives

contrasts with value orientation of
general public

→ potential for crowding out

Berglund & Matti (2006)

 ENVIRONMENT & ECONOMIC EFFICIENCY:
COST-BENEFIT ANALYSIS (CBA)

CBA: social appraisal of marginal investment projects, and

policies, which have consequences over time
It uses criteria derived from welfare economics, rather than
commercial criteria.
CBA seeks to correct project appraisal for market failure
Environmental impacts of projects/policies are frequently
externalities, both negative and positive
→ CBA seeks to attach monetary values to external effects →
considered alongside effects on ordinary inputs and outputs to
the project/policy
CBA = Benefit-cost analysis (BCA).
PUBLIC POLICY ECONOMIC APPRAISAL – COST-BENEFIT ANALYSIS

B = Benefits of Policy
C = Costs of policy
r = discount rate
t = time period
n = number of years (lifetime of policy)
 SOCIAL PROJECT APPRAISAL: CBA
Stages of CBA:

• Project/policy identification

• Forecasting consequences of project/policy for all affected individuals in each year of the project/policy
lifetime

• Expressing consequences in terms of monetary gains (benefits) and losses (costs)

• Discounting of benefits and costs

• Aggregation of all discounted benefits (i.e. present value benefits (PVB)) and all discounted costs (i.e. present
value costs (-PVC))

• Add PVB and –PVC → NPV (also known as Net Benefits (NB)). If NPV is +ve then project is economically
efficient.

• Undertake sensitivity analysis – test robustness of NPV outcome by adjusting parameters that are uncertain
 CLEAN AIR FOR EUROPE: COST BENEFIT ANALYSIS (CBA)

Total Cost Benefit Analysis Results (Billion Euro) – EU25 for Different
Ambition Levels
A B C MTFR

EU Annualised benefits (health, materials and crops) change over base

Low estimate 38 46 50 57

High estimate 120 147 160 182

EU-25 Annualised Costs - change over base line

Total 5.9 10.7 14.9 39.7

NET benefits

Low estimate 32 35 35 17

High estimate 115 136 145 142

Benefit to Cost Ratio

Low estimate 6.3 4.3 3.4 1.4

High estimate 20 14 11 4.6

MTFR = Maximum Technical Feasible A → MTFR imply increasingly strict levels of

Reduction regulation
 ENVIRONMENTAL COST-BENEFIT ANALYSIS

Example: Placing wind turbines in Dartmoor national park.

With Bd for development benefits and Cd for development costs, and
ignoring environmental impact
t =T
Bt − Ct T
Bt T
Ct
NPV =  = +
(1 + r ) (1 + r ) (1 + r )
t t t
t =0 0 0

= Bd − Cd
Denote as NPV’.

NPV taking account of environmental impacts is

NPV = Bd – Cd – EC = NPV’ – EC
where EC is the present value stream of project’s environmental impacts over the lifetime of the
project.
EC = Environmental Cost
Project should go ahead if
NPV’ = Bd – Cd > EC
 INVERSE ENVIRONMENTAL COST-BENEFIT ANALYSIS

• A wilderness development project should not go ahead if

EC ≥ NPV’ = Bd – Cd

• so that EC* = NPV’ = Bd – Cd

defines a threshold value for EC. For EC ≥ EC* the project should not go ahead.

Need to consider:
• Costs of ascertaining EC
• EC*/N, where N is the size of the relevant affected population
 THE KRUTILLA - FISHER MODEL

Krutilla-Fisher (1975) argued that value of wilderness services relative to those of development outputs will increase over
time due to
substitution possibilities wrt development output
technical progress in development activities
income elasticity of demand for wilderness services, fixed in supply
Assume preservation values grow at rate a -

T T
NPV =  {B − C}e − rt dt −  {Pe at }e − rt dt
0 0

which with B and C for constant flows of development benefits and costs, and Peat as the growing flow of preservation benefits, can be written:

NPV = NPV −  Pe−( r −a )t dt

T

For given NPV’, a>0 reduces NPV – a development is less likely to pass the NPV test if the Krutilla-
Fisher arguments hold
For a = r means preservation benefits effectively not discounted
a>r means effective negative discounting on preservation benefits
ENVIRONMENTAL COST-BENEFIT ANALYSIS - ADVANTAGES

• Addresses an important social concern (efficiency of resource allocation)

• Wide variety of impacts compared using same measurement unit

• Can be used in both policy and project appraisal as way of allocating scarce public
money across competing resources

• Better than referenda since takes account of both direction & strength of
preferences

• Allows emphasis of both economic value of environmental protection and

opportunity cost of protecting the environment
ENVIRONMENTAL COST-BENEFIT ANALYSIS - DISADVANTAGES

• Is allocative efficiency important to people?

• Technocentric + non-inclusive of community decision-making
• Is it immoral to place money values on non-market goods?
• Ecosystem complexity
• Discounting – is it ethical?
• Sustainability criterion – maybe in conflict with sustainability since assumes
trade-offs between natural and man-made capital
 DISTRIBUTIONAL ISSUES

•
INTERNALISING EXTERNALITIES: WINNERS & LOSERS

£
• Pareto improvement if X2 → X1
Marginal benefit to polluters

A • Victims could pay EDB to polluters

C and still be better off by BCD.
Marginal costs to victims of pollution

B • If tax of OT, victims better off by ECDB

T V
• Polluters worse off by OTDB

• What does Govt do with tax receipts?

E
• Compensate victims OEB?
D
0 X1 X2 X

Level of emissions, quantity of waste per unit

 ENVIRONMENTAL QUALITY & INCOME DISTRIBUTION

A CR R

P II

I I

Cp

0 qp A’ qr B’

Environmental quality
(qs + dq)

Source: Baumol & Oates (1988)

PUBLIC GOOD MODEL OF PROVISION OF ENVIRONMENTAL QUALITY

• Pure public good, e.g. air quality →

implies fixed amount – e.g. society
B agrees on qs

• Marginal valuation higher for rich

than poor – favours rich

A CR R

P II • Tiebout world – each person decides

I I spatial location – rich people choose
location with high env. quality –
Cp
closer to reality? Property values
0 qp qs A’ qr B’
differentiated?
Environmental quality
Tiebout (1956)
 INCIDENCE OF BENEFITS OF ENVIRONMENTAL POLICIES

• Policies:
• Where benefits flow to rich & poor e.g. tax on air pollution

• Where benefits flow mainly to poor e.g. minimum standards for water quality – since
wealth may live in areas that already have high standards. But maybe reflected in rents ↑

• Where benefits flow mainly to rich e.g. founding of conservation areas, whilst poorer areas
may become more polluted as dirty industries locate there
 ENVIRONMENTAL POLICY COST INCIDENCE

• Transitional Costs
• E.g. pollution abatement costs – unemployment risk if unilateral policy implementation
• Employment ↑ in e.g. clean technologies, but different skill levels?

• Continuing costs
• Abatement costs ↑ may lead to prices ↑

• Reconciliation of efficiency & distributional objectives?

 EMPIRICAL EVIDENCE – FENG ET AL. (2010)

• CO2 tax → GHG tax:

Tax
payment energy → food
as % of
income

• Tax payment as % of
income, by income deciles
in UK

• Regressive effect

Income decile
USE OF EXPLICIT DISTRIBUTIONAL WEIGHTS IN CBA
 USE OF EXPLICIT DISTRIBUTIONAL WEIGHTS IN CBA

Degree of Net benefits: Net benefits: Total Net

inequality Individual R Individual P benefits
aversion e

0 200 -100 100

0.5 163 -141 22

1 109 -283 -174

2 48 -1131 -1083
 LECTURE 1 CONCLUSIONS
• Environmental externalities and use of natural resources lead us to re-visit a
number of micro-economic principles
• Preferences – which type, for whom?

• At the same time, economics provides the analytical tools to assess the
benefits and costs of alternative policy responses
• Express non-market benefits in monetary terms
• Capture and analyse incidence of the costs and benefits of environmental and development
projects/policies