Environmental

Economics:
Applications, Policy, and
Theory

Some of the slides adopted from Janet M. Thomas and Scott

J. Callan
 Learning Outcomes
At the end of this topic , student
should be able to :-
1) Understand the economic
analysis for related projects
2) Understand the relationship of
economic and environmental
dimensions in achieving the
sustainable development
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 What is Environmental
Economics?

• Economics is concerned with

allocation of scarce resources—
including environmental
• Most environmental and
economic problems are linked.
The environment and economy are linked

• Economies receive inputs

from the environment.
Process them for use
Discharge the wastes back
into the environment
• Traditional
economists
ignore the environment.
Environmental economists
accept that human
economies exist within, and
depend on, the environment.
 Natural Resources the
Environment Provides

• Renewable resources:
– Perpetually available: sunlight, wind, wave
energy
– Renew themselves over short periods of
time
• These can be destroyed
• Non-renewable resources: can be
depleted
 Natural Resources the
Environment Provides
Renewable Nonrenewable

Forest Minerals
Water Fossil Fuels
Fruit/Nuts
Fish
 Natural Resources the
Environment Provides

• Waste are cleaned up

• Protect against flooding and hurricane
damage
• Medicine
• Providing space for recreation, scenery,
wildlife and aesthetic enjoyment
Environmental systems interact
 Natural systems are divided into categories
 Lithosphere: rock and sediment
 Atmosphere: the air surrounding the planet
 Hydrosphere: all water on earth
 Biosphere: the planet’s living organisms

 Categorizing systems allows humans to understand earth’s complexity.

 Most systems overlap

Hydrosphere
 Environmental Segments
• Lithosphere • Biosphere
• Hydrosphere • Atmosphere

Atmosphere

Biosphere

Lithosphere
Hydrosphere
 Scope of Environmental
Economics
• Economic growth and environmental
Balance
• Conservation recourses
• Pollution control and environment
 Atmospheric Pollution
Acid Rain Ozone depletion

Global warming
 Economic Perspective on
Environmental Management
• “Free” markets will generate excessive
pollution and overuse environmental
services, hence, collective or public
intervention is necessary
• How clean the environment should be? Till
MB=MC
• Design of policy instruments to achieve
environmental goals
• Valuation of non-market goods
 U.S. Environmental Policy
Early U.S. environmental
policy addressed land
management.(1st wave)
 To promote settlement,
and the extraction and
use of the West’s
abundant natural
resources.
 The Western lands
were considered
practically infinite, and
inexhaustible in natural
resources.
Second wave of U.S.
environmental policy addressed
impacts of the first.
 During this time the government
created national parks, wildlife
refuges, and the forest system.

Grand Canyon of the Yellowstone, 1872 by Thomas Moran John Muir & Teddy Roosevelt in Yosemite
Earth Day
April 22, 1970
20 million Americans participated!
The public demanded that the federal
government do more to protect the
environment. Why?
 The publication of Rachel Carson’s
Silent Spring, 1962
 The burning of the Cuyahoga River
on several occasions in the 1950s
and 1960s.
 The Santa Barbara, California oil
spill in 1969.
The third wave responded largely to pollution.

NEPA (National Environmental Policy Act, 1970) was signed in 1970 and
require EIS (Environmental Impact Statement) for federal actions and The
Environmental Protection Agency (EPA) is created.

Other prominent laws followed: Two major laws were the Federal Water
Pollution Control Acts (1965 and 1972) and Clean Water Act (1977).
Approaches to Environmental Policy
1. Command-and-control
 An approach that sets strict legal limits, and
punishments as opposed to financial
incentives.
 Ex. Regulate pollutants such as SO2 and NOx

Auto emissions Coal plant

Approaches to Environmental Policy
The food that subsidies support
2. Subsidy Fruits &
vegetables <1%
 A government Nuts & legumes 2%
giveaway of cash or Sugar, oil, Meat &
publicly owned starch, dairy 63%
alcohol 15%
resources used to
promote a particular Grains
20%
activity.
Approaches to Environmental Policy
3. Green taxes
 Discourages undesirable activities by taxing
activities and products that cause undesirable
environmental impacts.
 It’s a tool for policy as well as a way to fund
government.

Electronic waste tax

Tire disposal tax
Approaches to Environmental Policy
4. Markets in permits
 The government can issue permits to
individual polluters.
 They may buy, sell, and trade these
marketable emissions permits
 this provides financial incentives to reduce
pollution.
Approaches to Environmental Policy

5. Ecolabeling
 tells consumers which brands use environmentally benign processes.
 Real Progress

 In 1850 New Hampshire was

35% woods; today it is 80%
woods. Much of
Massachusetts, New
Hampshire, and New York
exhibit similar patterns.
 Costa Rica now protects 25%
of its entire country in national
parks.
Real Progress

Clean Air Act, 1970

 EPA successfully
improved ozone
(smog), carbon
monoxide, sulfur
dioxide, nitrogen
dioxide, lead, and
particulate soot in
U.S.
 EPA announced in
April of 2009 that CO2
is a pollutant and will
be regulated. Source: AQMD.gov, 2009
Real Progress
Denmark no longer imports oil because of widespread adoption of wind
power.
Iceland no longer imports oil because
of widespread construction of
geothermal power plants.
Brazil no longer imports oil now that it
uses sugar cane to make bio-fuels.
 The Role of Economics in
Environmental Management
Economics and the Environment
 Economic theory explains what we
observe in reality, including
environmental problems
 Recognize the link between economic
activity and the environment using
models
 Circular Flow Model
 Materials Balance Model

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 Circular Flow Model
 Shows the real and monetary flows of economic
activity through the output and factor markets (see
next slide)
 Formsthe basis for modeling the relationship
between economic activity and the environment
 Butdoes not explicitly show the linkage
between economic activity and the environment

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Circular Flow Model

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 Materials Balance Model

 Places the circular flow within a larger schematic to

show links between economic activity and the natural
environment via two sets of flows
 Flow of resources from the environment to the economy
 The focus of Natural Resource Economics
 Flow of residuals from the economy to the environment
 The focus of Environmental Economics
 Residuals are pollution remaining in the environment
after some process has occurred
 Residuals can be delayed, but not prevented, through
recovery, recycling, and reuse
 Shown as inner flows in the model
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Materials Balance Model

The Interdependence of Economic Activity and Nature

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Source: Adapted from Kneese, Ayres, and D'Arge (1970).

 Science and the Materials Balance
Model

 The flow of resources and residuals are balanced

according to laws of science
 First Law of Thermodynamics
 Matter and energy can neither be created nor destroyed
 Second Law of Thermodynamics
 Nature’s capacity to convert matter and energy is not
without bound

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Fundamental Concepts
in Economics
Terms and Definitions
Causes of Environmental
Damage
 Natural Pollutants arise from nonartificial processes in
nature
 e.g., ocean salt spray, pollen

 Anthropogenic Pollutants are human induced and

include all residuals associated with consumption and
production
 e.g., chemical wastes, gases from combustion
 Of greater concern to environmental economists

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Sources of Pollution

 Sources grouped by mobility

 Stationary Sources: fixed-site
 Mobile Source: any nonstationary source
 Sources grouped by identifiability
 Point source: single identifiable source
 Nonpoint Source: a source that cannot be accurately
identified, degrading in a diffuse way

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 Scope of Environmental Damage

 Local Pollution
 Damage not far from the source

 e.g., urban smog

 Regional Pollution
 Damage extends well beyond the source

 e.g., acidic deposition

 Global Pollution
 Involving widespread environmental effects with global implications

 e.g., global warming, ozone depletion

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 Environmental Objectives

 Environmental Quality – reduction in anthropogenic

contamination to socially acceptable levels
 Sustainable Development – management of resources to
ensure long-term quality and abundance
 Biodiversity – assuring the variety of distinct species,
genetic variability, and variety of inhabitable
ecosystems

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Environmental Policy
Planning
 Environmental planning involves many segments of
society
 In the U.S., the Environmental Protection Agency (EPA)
acts as liaison to numerous constituents within each
sector

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 Environmental Policy Planning

EPA headquarters are in Washington, D.C., and there are 10 regional offices
across the nation.
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Source: Adapted from Vaupel (1978), Figure 5-3, p. 75.

National Environmental Policy
Act (NEPA) of 1969
 Directs the integration of effort across agencies,
executive departments, and branches of government in
the U.S.
 Guides U.S. federal environmental policy
 Requires that environmental impact of public policy
proposals be addressed
 Calls for an Environmental Impact Statement (EIS) on
proposals or major federal actions

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 Risk Analysis
Chief Tool Guiding Policy Planning

 Two decision-making procedures

 Risk Assessment – qualitative and quantitative evaluation of risk posed by
an environmental hazard
 Risk Management – decision process of choosing from alternative responses
to environmental risk

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Risk Management
Policy Evaluation Criteria

 Economic Criteria
 Allocative Efficiency – requires resources be appropriated
such that benefits are equal to costs
 Cost-effectiveness – requires the least amount of resources
be used to achieve an objective
 Equity Criterion
 Environmental Justice – concerned with the fairness of the
environmental risk burden across segments of society or
geographic region

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Government Policy Approach

 Command-and-Control Approach – regulates polluters through the use

of rules
 Market Approach – incentive-based policy that encourages conservation
or pollution reduction
 Can follow the “polluter-pays principle” whereby the
polluter pays for the damage caused

 What is the EXAMPLE of Government Policy Approach

that had been implemented in Malaysia?

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Setting the Time Horizon

 Management Strategies – a short-term strategy

intended to manage an existing problem
 An ameliorative intent
 Pollution prevention (P2) – a long-term
strategy aimed at reducing the amount of
toxicity of residuals released to nature
 A preventive intent

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