ENVIRONMENTAL ECONOMICS

UNIT-1
SUSTAINABLE DEVELOPMENT
Introduction to Sustainable Development
 Sustainable development is development that meets the needs of the present, without
compromising the ability of future generations to meet their own needs.
 The concept of sustainable development can be interpreted in many different ways,
but at its core is an approach to development that looks to balance different, and often
competing, needs against an awareness of the environmental, social and economic
limitations we face as a society.
 Living within our environmental limits is one of the central principles of sustainable
development. One implication of not doing so is climate change.
 But the focus of sustainable development is far broader than just the environment. It's
also about ensuring a strong, healthy and just society. This means meeting the diverse
needs of all people in existing and future communities, promoting personal wellbeing,
social cohesion and inclusion, and creating equal opportunity.
 The concept of sustainable development nowadays has a focus on economic
development, social development and environmental protection for future generations.
 Sustainable development requires six central capacities.
  Sustainability Venn diagram, where sustainability is thought of as the area where the
three dimensions overlap.

Economy-Environment interlinkages
Linkage between environment and economy can be studied from the following points of
consideration:
1) Environment in Economic Analysis
2) Economics in Environmental Analysis
3) Environmental problems and their solution in Economies
4) Mutual Dependence
5) Environment provides resource’s to the economy
6) Environment assimilates the waste and provides utility
1) Environment in Economic Analysis
Environmental issues are considered in the production and consumption analysis in
economics. Green production and green consumption is demand of the modern world. In
economics tools of fiscal policies are discussed in the environmental context. There are three
factors of production, natural, physical and human factors. Natural factors are directly
connected with the environment.
Environmental cost benefit analysis and input-output analysis becomes integral part of
mainstream economics. It is key consideration in all the decisions of production, factor
allocation, pricing etc. There are two types of market systems, market oriented and state
oriented. Market Oriented system creates more pollution problems than the state oriented
system.
Environmental considerations are very important in Micro and Macro economics, agriculture,
industrial economics, public finance, regional economic planning etc. Environmental policy
becomes an important part of economic policy. Environment Ministry implements this
environment policy. This Ministry is considered as a ‘super ministry’, because all other
ministries have to depend on this ministry.
2) Economics in Environmental Analysis
Environment resources, their allocation and utilization are considered in the context of their
economic cost benefit. The demand and supply, benefit and losses, equilibrium of
environment resources all are analyzed in the context of economics. There are many
environment theories which have developed with the integration of economic theories. These
include environment resource planning, sustainable environment, development environment,
input-output model, environment cost analysis, environment policy, environment pricing,
environment budgeting, environment fiscal analysis etc.
Scarcity of natural resources is crucial problem of developing countries. Economists can
guide to environment analysis in obtaining maximum satisfaction of wants within the context
of limited natural resources. Economics can guide environmentalists to decide that manner in
which either maximum benefits or minimum loss would be obtained. We can explain
pollution problems in economic terminology.
3) Environmental problems and their solution in Economies
With the help of input-output analysis, cost benefit analysis, pollution tax and environmental
subsidies, economics shows various ways and means to solve the environmental problems.
Environmental problems are basically man-made and economics has solution for them. There
should be no over utilization of natural resources. We should develop some basic standards
for use of natural resources.
4) Mutual Dependence
There are environmental causes for economic problems and economic causes for
environment problems. There are economic solution for environment problems and
environment solution for economic problems. In the same way, environment theories are
needed for economic theories and economic theories are essential for environment theories.
Industrial and domestic wastes are the prime cause of water pollution and air pollution.
Polluted water gets absorbed in land and creates land pollution. Economics has a solution for
this. According to economics, air, land, water, river, ocean etc. are public goods which spread
out pollution. We should control these polluted public goods.
5) Environment provides resource’s to the economy
Environment provides land, water, air, energy resources, coal, oil, forests, minerals and
metals and so many other natural resources which are essential for the economic development
of the economy. It provides services which are directly used by the consumers i.e. air we
breathe and water we drink as a liquid of life. It provides forests, water reservoirs, rivers etc.
and wildlife sanctuaries which also play economic roles for the mankind.
6) Environment assimilates the waste and provides utility
Natural resources are input to the economic system and natural wastes are recycled. For
example, trees dispose of their leaves, decompose and are converted into an organic fertilizer
for plants. Whatever we use up for way of resources, must end up somewhere in that
environment system and cannot be disappeared or destroyed.
Environment takes the non-cyclical wastes and converts them back into harmless or
ecologically useful products. It acts as a sink for all the waste products that are the result of
the process of production and consumption. The environment is not a passive sink, it acts
upon the waste products to clean up the environment.
Meaning of Sustainable Development
Sustainable development is defined as an approach to developing or growing by using
resources in a way that allows for them to renew or continue to exist for others. Using
recycled materials or renewable resources when building is an example of sustainable
development.
Types of Sustainability
It actually refers to four distinct areas
1) Human Sustainability
2) Social Sustainability
3) Economic Sustainability
4) Environmental Sustainability
The above four are known as the four pillars of sustainability.
1) Human Sustainability
Human sustainability aims to maintain and improve the human capital in society. Investments
in the health and education systems, access to services, nutrition, knowledge and skills are all
programs under the umbrella of human sustainability.
Human sustainability encompasses the development of skills and human capacity to support
the functions and sustainability of the organisation and to promote the wellbeing of
communities and society.
2) Social Sustainability
Social sustainability aims to preserve social capital by investing and creating services that
constitute the framework of our society. The concept accommodates a larger view of the
world in relation to communities, cultures and globalisation. It means to preserve future
generations and to acknowledge that what we do can have an impact on others and on the
world. Social sustainability focuses on maintaining and improving social quality with
concepts such as cohesion, reciprocity and honesty and the importance of relationships
amongst people.
3) Economic Sustainability
Economic sustainability aims to maintain the capital intact. If social sustainability focuses on
improving social equality, economic sustainability aims to improve the standard of living. In
the context of business, it refers to the efficient use of assets to maintain company
profitability over time.
Maintaining high and stable levels of economic growth is one of the key objectives of
sustainable development. Abandoning economic growth is not an option. But sustainable
development is more than just economic growth. The quality of growth matters as well as the
quantity.
4) Environmental Sustainability
Environmental sustainability aims to improve human welfare through the protection of
natural capital (e.g. land, air, water, minerals etc.). Initiatives and programs are defined
environmentally sustainable when they ensure that the needs of the population are met
without the risk of compromising the needs of future generations.
The principle of the four pillars of sustainability states that for complete sustainability
problems to be solved in relation to all four pillars of sustainability and then need be
maintained.
Need for Sustainable Development
Economic development without environmental considerations can cause serious
environmental damage in turn impairing the quality of life of present and future generations.
Sustainable development attempts to strike a balance between the demands of the economic
development and the need for protection of the environment. It seeks to combine the elements
of economic efficiency, intergenerational equity, social concerns and environmental
protection.
Limits to Growth
The limits to growth concept posits that unlimited economic growth is not possible—that at
some point the world’s growing population will consume too great a quantity of natural
resources (such as clean water and fossil fuels) for human society to exist.
Reverend Thomas Robert Malthus (1766–1834) raised the issue of the growing population in
the context of limited food resources in his “An Essay on the Principle of Population.” He
postulated that “population, when unchecked, increases in a geometric ratio. Subsistence
increases only in an arithmetical ratio.
MIT scientists ran a computer simulation of an integrated global model (called World3) that
linked the world economy with the environment. The five main variables in the model were
world population, industrial production, food production, resource consumption, and
pollution. The authors explored interrelationships and feedback patterns by altering growth
trends among the five variables.
The model predicted that continued growth in the global economy would lead to global
population and economic collapse in the mid-twenty-first century as a result of increased
ecological damage and decreased resources. They also found that collapse could be avoided
with changes in policy, behaviour, and technology.
The study presented, what was for many at the time, a novel finding that the demands of the
human population could exceed the carrying capacity of the earth. The MIT group identified
the need to stabilize growth so that humans could live within the ability of the earth’s natural
system to provide a sustainable yield of resources essential to human life. They found that
technology alone could prolong but not prevent a system collapse.
Environmental Kuznets Curve
The environmental Kuznets curve (EKC) is a hypothesized relationship between various
indicators of environmental degradation and per capita income. In the early stages of
economic growth, pollution emissions increase and environmental quality declines, but
beyond some level of per capita income (which will vary for different indicators) the trend
reverses, so that at high income levels, economic growth leads to environmental
improvement. This implies that environmental impacts or emissions per capita are an inverted
U-shaped function of per capita income. Fig. 1 shows an example of an estimated EKC. The
EKC is named after Simon Kuznets who proposed that income inequality first rises and then
falls as economic development proceeds.
An example of an estimated environmental Kuznets curve (EKC) is shown in below figure.

The EKC is named for Simon Kuznets, who hypothesized that income inequality first rises
and then falls as economic development proceeds. Emissions of various pollutants, such as
carbon dioxide, sulphur, and nitrogen oxides, are tightly coupled to the use of energy. Hence,
the EKC is a model of the relationship among energy use, economic growth, and the
environment.
The EKC has been the dominant approach among economists to modelling ambient pollution
concentrations and aggregate emissions since Grossman and Krueger (1991) introduced it.
The EKC is an essentially empirical phenomenon, but most estimates of EKC models are not
statistically robust. Concentrations of some local pollutants have clearly declined in
developed countries, but emissions of many pollutants have increased.
Studies of the relationship between per capita emissions and income that attempt to avoid
various statistical pitfalls find that per capita emissions of pollutants rise with increasing per
capita income when other factors are held constant. However, changes in these other factors
may be sufficient to reduce pollution. In rapidly growing middle-income countries, the effect
of growth overwhelms these other effects. In wealthy countries, growth is slower, and
pollution reduction efforts can overcome the growth effect. These econometric results are
supported by evidence that, in fact, pollution problems are being addressed in developing
economies. However, there is still no consensus on the drivers of changes in pollution.
The EKC is an essentially empirical phenomenon, but most of the EKC literature is
statistically weak. It is very easy to do bad econometrics, and the history of the EKC
exemplifies what can go wrong. The EKC idea rose to prominence because few paid
sufficient attentions to the relevant diagnostic statistics. Little or no attention has been paid to
the statistical properties of the data used such as serial dependence and random walk trends in
time series, and few tests of model adequacy have been carried out or presented. However,
one of the main purposes of doing econometrics is to test which apparent relationships are
valid and which are spurious correlations.
Sustainability Debate
Sustainable development is defined by the World Commission on Environment and
Development(WCED) as “development that meets the needs of the present without
compromising the ability of future generations to meet their own needs”. For the concept of
sustainability to be meaningful, therefore, it must refer to maintaining, renewing or restoring
something specific, but also include the ethical dimension of fairness of trade-off between
current economic pressures and the future needs of the environment. The papers in this
current issue therefore refer to each of these dimensions, reinforcing the view that
“sustainability is becoming a key business imperative, as the eternal search for domination
over nature is replaced by the challenge of achieving environmental balance”.
The sustainable development debate is based on the assumption that societies need to manage
three types of capital (economic, social, and natural), which may be non-substitutable and
whose consumption might be irreversible. Natural capital can not necessarily be substituted
by economic capital. While it is possible that we can find ways to replace some natural
resources, it is much less likely that they will ever be able to replace ecosystem services, such
as the protection provided by the ozone layer, or the climate stabilizing function of the
amazonian forest.
The concept of sustainable development has been criticized from different angles. While
some see it as paradoxical (or an oxymoron) and regard development as inherently
unsustainable, others are disappointed in the lack of progress that has been achieved so far.
Part of the problem is that "development" itself is not consistently defined. Such a viewpoint
contradicts the mainstream academic community, which frequently concedes that the
processes of capitalism are incompatible with the long-term sustainability of human life.
Issues of Energy
Economics of energy
Properties of Energy Resources and Energy Commodities

Non-renewable energy
Non-renewable energy comes from sources that will run out or will not be replenished in our
lifetimes—or even in many, many lifetimes. Most non-renewable energy sources are fossil
fuels: coal, petroleum, and natural gas. Carbon is the main element in fossil fuels. For this
reason, the time period that fossil fuels formed (about 360-300 million years ago) is called the
Carboniferous Period.
All fossil fuels formed in a similar way. Hundreds of millions of years ago, even before the
dinosaurs, Earth had a different landscape. It was covered with wide, shallow seas and
swampy forests. Plants, algae, and plankton grew in these ancient wetlands. They absorbed
sunlight and created energy through photosynthesis. When they died, the organisms drifted to
the bottom of the sea or lake. There was energy stored in the plants and animals when they
died. Over time, the dead plants were crushed under the seabed. Rocks and other sediment
piled on top of them, creating high heat and pressure underground. In this environment, the
plant and animal remains eventually turned into fossil fuels (coal, natural gas, and
petroleum). Today, there are huge underground pockets (called reservoirs) of these non-
renewable sources of energy all over the world.
There are four major types of nonrenewable resources: oil, natural gas, coal, and nuclear
energy. Oil, natural gas, and coal are collectively called fossil fuels. Fossil fuels were formed
within the Earth from dead plants and animals over millions of years—hence the name
“fossil” fuels. They are found in underground layers of rock and sediment. Pressure and heat
worked together to transform the plant and animal remains into crude oil (also known as
petroleum), coal, and natural gas.
The plants and animals that became fossil fuels lived in a time called Carboniferous Period,
around 300 to 360 million years ago. The energy in the plant and animal remains originally
came from the sun; through the process of photosynthesis, solar energy is stored in plant
tissues, which animals then consume, adding the energy to their own bodies.
When fossil fuels are burned, this trapped energy is released.
Crude oil is a liquid fuel fossil fuel that is used mostly to produce gasoline and diesel fuel for
vehicles, and for the manufacturing of plastics. It is found in rocks below Earth’s surface and
is pumped out through wells.
Natural gas is widely used for cooking and for heating homes. It consists mostly
of methane and is found near oil deposits below Earth’s surface. Natural gas can be pumped
out through the same wells used for extracting crude oil.
Coal is a solid fossil fuel that is used for heating homes and generating power plants. It is
found in fossilized swamps that have been buried beneath layers of sediment. Since coal is
solid, it cannot be extracted in the same manner as crude oil or natural gas; it must be dug up
from the ground.
Nuclear energy comes from radioactive elements, mainly uranium, which is extracted from
mined ore and then refined into fuel.
Unfortunately, human society is—for the time being—dependent on nonrenewable resources
as its primary source of energy. Approximately 80 percent of the total amount of energy used
globally each year comes from fossil fuels. We depend on fossil fuels because they are
energy-rich and relatively cheap to process. But a major problem with fossil fuels, aside from
their being in limited supply, is that burning them releases carbon dioxide into the
atmosphere. Rising levels of heat-trapping carbon dioxide in the atmosphere is the main
cause of global warming.
Alternative energy sources, such as wind and solar energy, are a possible solution to the
depletion of nonrenewable sources. Both of these clean energy sources are available in
unlimited supply.
Advantages and Disadvantages
Fossil fuels are a valuable source of energy. They are relatively inexpensive to extract. They
can also be stored, piped, or shipped anywhere in the world. However, burning fossil fuels is
harmful for the environment. When coal and oil are burned, they release particles that can
pollute the air, water, and land. Some of these particles are caught and set aside, but many of
them are released into the air.
Burning fossil fuels also upsets Earth’s “carbon budget,” which balances the carbon in the
ocean, earth, and air. When fossil fuels are combusted (heated), they release carbon dioxide
into the atmosphere. Carbon dioxide is a gas that keeps heat in Earth’s atmosphere, a process
called the “greenhouse effect.” The greenhouse effect is necessary to life on Earth, but relies
on a balanced carbon budget. The carbon in fossil fuels has been sequestered, or stored,
underground for millions of years. By removing this sequestered carbon from the earth and
releasing it into the atmosphere, Earth’s carbon budget is out of balance. This contributes to
temperatures rising faster than organisms can adapt.
The Scarcity of Non-Renewable Resources
Non-renewable resources are sources of energy whose supply or reserves are fixed. These are
resources that are used and consumed faster than nature produces them. As Investopedia
points out, it takes billions of years to form these resources, making their use unsustainable.
As supply decreases, it becomes uneconomic to use them. So for practical purposes these
resources are finite. Recycling and using alternate renewables can help extend their limited
supply.
Four Major Limited Energy Sources
There are four non-renewable energy sources that are used most often. The first three are
fossil fuels. This means that they were formed from the remains of plants and animals eons
ago. Fossils fuels can be in a solid, liquid, or gas form.
Fossil fuels such as coal, natural gas, and crude oil takes millions of years to form,
emphasizes National Geographic. Fossil fuels are mainly made of carbon, as their origin is
the remains of dead plants, algae and plankton which settle into seas or lakes. Over hundreds
of million of year sediments accumulated and buried them underneath "creating pressure and
heat." This gradually changed the organic remains into coal, petroleum and natural gas. So
when fossil fuels are burnt carbon that has been collecting for millions of years is released
and add to the environment.
Oil and Petroleum Products
The BBC reports that oil reservoirs are found between rocks, which can be pumped through
pipes easily. Environment and Energy Study Institute (EESI) says crude oil also occurs in
shale and tar sands. As reservoirs dry up, industries are turning to heavier crude oil in tar
sands and shale that is more difficult, polluting and expensive to extract.
As EIA (Non Renewable) explains, crude oil is processed and refined to make petroleum
derivatives (such as gas or diesel), propane, butane, and ethane. All can be used as
fuel/energy sources. Various other non fuel products like plastics, fertilizers, pesticides and
pharmaceuticals use crude oil as a major ingredient according to EESI.
Once the oil is taken out of the ground, it is gone forever. The earth can replenish oil only in
geological time spans.
Natural Gas
Similar to crude oil, there are two types of natural gas, explains Union of Concerned
Scientists.
Conventional natural gas is found in porous rocks that can be easily tapped by wells and
pipes.
Unconventional natural gas like "shale gas, tight gas, coal bed methane, and methane
hydrates, has been more difficult and costly to exploit than conventional deposits, until
recently." Both shale gas and coal bed methane gas are extracted through fracking, while
tight gas utilizes horizontal drilling and methane hydrates are trapped in water frozen under
the oceans in the Artic.
Natural gas is used for energy production, and as per an EIA Short-Term Energy Outlook,
contributed to 34% of the energy in the U.S in 2016. It's also used for heating and electricity
for buildings, according to EESI. A variety of other products need natural gas for production,
like fertilizers and plastics.
Coal
Coal is the solid form of the three fossil fuels. The World Coal Association states that U.S.
was the second largest producer of coal after China in 2014. Coal must be mined to be
removed from the earth and there are two types of mining
Surface mining produces 66% of the coal in America in 2015 according to EIA's Annual Coal
Report (Table 11). Up to 90% of coal near the surface is dug out of the ground with special
machines, according to World Coal Institute.
Underground mining is used for deeper coal pockets. Room-and-pillar, and longwall mining
are two methods employed and yield up 40 to 75% of coal points out World Coal Institute.
Underground mining provided 34% of coal in the U.S in 2015 according to the EIA's coal
report.
In 2016, coal still accounted for 30% of energy in the U.S., according to EIA Short-Term
Energy Outlook. In the previous year in 2015, as EIA figures show, coal saw a sharp drop in
use of 15% in the U.S. A 2016 Guardian report accounts this decline foremost to availability
of cheap natural gas, and secondly to a spike in growth of wind and solar power generation,
along with an emphasize to reduce emissions, as coal is the most polluting of all fuels.
Backstop Technology
A backstop technology provides resources at a constant marginal cost for an indefinitely long
time. Heal's formal model of a backstop technology supposed that output is produced by
capital and resources.
A backstop technology is defined as a new technology producing a close substitute to an
exhaustible resource by using relatively abundant production inputs and rendering the
reserves
of the exhaustible resource obsolete when the average cost of production of the close
substitute
falls below the spot price of the exhaustible resource. (Dasgupta and Heal, 1978) For
instance,
the technology of harnessing solar energy can be perceived as a backstop technology to oil,
coal and natural gas. Hence, the development of a backstop technology shortens the planning
horizon and, in turn, can accelerate the extraction and lower the spot prices of the exhaustible
resource.
We all know that as the demand for a resource that is in limited supply increases, it will
kick in a process that results in the exploitation of other alternative resources to meet human
needs. For instance, as the demand for oil increases even as its available supply decreases,
this
will cause the price of oil to shoot up and push businesses to look for alternative sources of
energy. This alternative source of resources is known as “backstop”. So, backstop is nothing,
but the substitute resources to exhaustible resources.
Optimal depletion and Price of Non-Renewable Resources in presence of Backstop
So far, we have considered optimal depletion of an exhaustible resource, we implicitly
ruled out availability of any substitute or backstop. But it may happen that a substitute
resource,
possibly a renewable resource, is available at a constant MC. For example, a backstop of oil
or
natural gas may be solar substitute. Then the question arises what would be the optimal
depletion rule in these circumstances?
Suppose that this alternative, or “backstop” resource, which is perfectly substitute of
the non-renewable resource, can be supplied at some high cost but in fairly large quantities so
that it is inexhaustible for all practical purposes. Since the backstop has a virtually unlimited
supply, its price will be just sufficient to cover its marginal extraction cost. Implicitly,
backstop
technologies are assumed to be renewable. Ethanol fuel from renewable corn and sugar is
frequently seen as a backstop for petroleum. In the presence of a backstop, there is a ceiling
on
the net price of the non-renewable resource. In theory, as soon as the price of the non-
renewable
resource just exceeds the price of the backstop, the former will be priced out of the market
and
the demand would be entirely satisfied by the latter resource. (In effect, the price of the
backstop is like the vertical intercept on the linear demand curve for the non-renewable
resource.) The overall result is the same as in the case with multiple sources of the same
nonrenewable resource. The net price of the non-renewable resource will rise at the interest
rate till it is completely exhausted. Exactly at that instant the net price would be equal to the
price of the backstop and production would shift from the non-renewable to the backstop
resource.
It is easy to argue that in the absences of a backstop, the non-renewable resource would be
depleted at exactly the time when production shifts to the backstop. Suppose this is not the
case
and there are some remaining reserves of the non-renewable resource when its price rises to
that of the backstop. Then the resource owner would be unable to sell the resource on the
market
since the net price necessary to cover the scarcity rent would exceed the price of a cheaper
substitute. The only option is to sell the resource at an earlier and lower price. However, this
would increase the supply in the market and the net price would fall. In fact, the price would
decline to a level such that when it rises at the interest rate the resource is exhausted at the
price
of the backstop. A similar argument emerges in the situation where the resource is exhausted
before its price reaches the ceiling set by the backstop. In this case, there is a large excess
demand which would bid up the price for the resource. The profit-maximizing resource
owner
would then hold back some reserves to sell at the future higher price and the production
horizon
would be extended. The above example assumes the supply curve for the backstop is
horizontal
at a price just sufficient to cover its marginal extraction cost. This assumption is not
necessary.
It is entirely possible that the price of the backstop is rising slowly. As long as the backstop
price is rising slower than the interest rate, then the price trajectories for the non-renewable
resource and the backstop will intersect at some point. At that point, the price of the backstop
will become the ceiling for the price of the non-renewable resource and the latter resource
will
be completely depleted. From that point on, the market will be completely supplied by the
backstop. Figure 1shows the intersection of the price trajectories for the non-renewable and
backstop resources, where Pnr indicates the price of the non-renewable resource, Pb indicates
the price of the backstop, and Tnr indicates the depletion of the non-renewable resource.