1. Nature, Scope and Key Concepts in Environmental Economics

2. Learning Outcomes After this topic you should be able to
Discuss the key environmental issues in today’s world
Understand the economic impact of environment issues
show how the economy and the environment are related to each other at the most basic level
Understand the inherent trade-offs between production and environmental quality between present and future generations
State the fundamental balance phenomenon and from this understand how best to reduce residual flows from production and consumption activities
Identify the key environment issues and drivers of environmental change

3. The Problem
There has been an unprecedented global economic growth especially since the 1920s
Growth has been unevenly distributed & incurred significant cost to the environment
World population has increased from 3bn in 1970 to 7bn today
Its expected to reach 9bn by 2050
Serious economic, social and environmental consequences as a result

4. Environment and Economic Growth
Environment problems will be the biggest challenge to economic growth by 2030 (OECD, 2012) (Stern, 2006, 2008)

5. The key environment issues
Climate Change
Biodiversity
Access to fresh drinking water
Air Quality

6. Environmental Disasters and Economic Growth
Environment disasters cost 8.6% in annual GDP growth in 2013
Future GDP costs of climate change are unknowable. Stern Report, 2006, estimated this at 20 per cent of GDP
We underestimated the risks……we underestimated the damage associated with termperature increases….and we underestimated the probabilities of temperature increases” (Nicolas Stern, 2008)

7. Drivers of Environmental Change
Demographic Developments
Urbanisation
Economic Growth

8. Population and demographic developments
Population growth is a key driver of local and global environmental change
Due to
Increased consumption of natural resources and land use
Changes in wealth and age structure

9. Urbanisation
Worlds population is becoming increasingly urbanised. In % of world population lived in urban areas. By 2009 that share had reached 50%
Urbanisation has positive and negative environmental consequences.
On the positive side urbanisation can lead to the concentration of activities and allow for economies of scale and easier access (ie water & energy)
On the negative side, a greater concentration of population can cause higher levels of air pollutions

10. Economic Growth
Economic Growth and rising per capita income, if based on the increased use of natural resources exacerbate environmental pressures
However other sources of growth, such as technological progress or improvement in education and human skills can decouple environmental pressures from economic growth

11. Links between economic activity and environmental pressures
Energy use is driven by economic activity and technological developments
As GDP is projected to quadruple so will energy use – around 80% increase over global energy consumption in 2010

12. Scope of the module
Given the urgent need to address key environmental issues it is important to explore the different policy options available to tackle the problem
The first eight topics will address the effectiveness of a variety of policies employed in reducing environmental issues
The last four topics will be dedicated to examining specific issues including peak oil, overfishing, deforestation and climate change

13. Defining Environmental Economics
Environmental economics is the application of the principles of economics to the study of how environmental resources are managed
It focuses primarily on how and why people make decisions that have consequences for the natural environment
Also concerned with how economic institutions and policies can be changed to consider environmental quality

14. The Economy and the Environment
Two economic functions pursued by society are production and consumption
Natural world is the provider of raw materials and energy inputs
The study of nature in its role as provider of raw materials is called natural resource economics (a)
The impact of economic activity on the quality of the natural environment is called environmental economics (b)
Fig 1: The economy and the environment
Nature a
Economy b

15. The Environment: An Economic and Social Asset
Inputs of natural resources are important in economic production
Environment quality can be thought of as a productive asset for a society
In other words, there is a trade off between conventional economic output and environmental quality
Fig 2 shows a PPF which is a curve showing the different combinations of two things a society can produce at any given time, given its resources and technological capabilities

16. The PPF: Trade-off between environmental quality and market goods
Fig 2 (a) PPF today
Market
goods
Fig 2 (b): PPF in 60 years
Market goods C2 C4 C3 C1 e2 e1 e4 e3
Environmental
Quality
Environmental
Quality

17. The PPF
The PPF shows the different combinations of market output and environmental quality that are available to a group of people who have a fixed endowment of resources and technology
In fig 2 (a) If the current level of economic output is C1, and increase to C2 can be obtained only at the cost of a decrease in environmental quality
Where society chooses to locate itself on the PPF is a matter of social choice
In fig 2 (b) shows that degrading the environment too much today will affect future possibilities and PPF will shift inwards. Future generations can have the same level of output as present generation but only at a lower level of environmental quality

18. The Fundamental Balance
The Fundamental Balance Phenomenon says that in the long run all materials taken out of the natural system by human beings must eventually end up back in the system.
M = Rdp + Rdc
Where M = Raw materials extracted
Rdp = discharged producer residuals
Rdc= discharged consumer residuals
Economy is divided into two broad segments (producers and consumers)
Production and consumption create ‘residuals’ which may be emitted into the air or water or land
The implication is that to reduce the mass of residuals disposed into the environments, it is necessary to reduce the level of raw materials into the system

19. The Fundamental Balance 2
Rdp + Rdc=M=G + Rp-Rrp –Rrc
This says that the quantity of raw materials (M) is equal to the output of goods and services (G) plus production residuals (Rp) minus the amounts that are recycled from producers (Rrp) and consumers (Rrc)
There are therefore three ways of reducing M
Reduce G
Reduce RP
Increase Rrp Rrc

20. Summary
There is global agreement that climate change, loss of biodiversity, access to fresh water and air pollution are serious issues that need to be addressed through international policy action
Global coordination effort is required to find the most effective solutions
The type of policy action matters (awareness campaigns, regulation, punitive legislation, carbon taxes, green technology)

21. Summary
The topic explored some basic linkages between the economy and the environment
Discussed the trade-offs between conventional economic goods and environmental quality between current and future generations using the PPF
Introduced the fundamental balance phenomenon and how we might reduce residuals from production and consumption

22. Required Reading
OECD (2012) Environmental Outlook, OECD Publishing, USA, MA. Executive Summary and chapter 2 (available on sulis)
Field, B and M. Field (2013). Environmental Economics: An Introduction (6th ed) McGraw Hill, Chapter 1 and Chapter 2