1. Environmental Economics and Environmental Policy
Chapter 5
Environmental
Economics and
Environmental Policy

2. This lecture will help you understand:
Economic theory
Economic growth and health, and sustainability
Environmental and ecological economics
U.S. and international environmental policy
The environmental policy process
Science and policy

3. Central Case Study: San Diego and Tijuana
Rain washes pollutants into Mexico’s Tijuana River
Then onto U.S and Mexican beaches
A new sewage treatment facility reached capacity
In 3 years
Poor Mexicans suffer most
Contaminated water, disease, industrial waste

4. Economics People say protection threatens economic growth
But environmental protection is good for the economy
Economics studies how people use resources to provide goods and services in the face of demand
Environmental problems are also economic problems
Ecology and economics come from oikos (household)
Economy: a social system that converts resources into:
Goods: manufactured materials that are bought, and
Services: work done for others as a form of business

5. Types of modern economies
Subsistence economy: people get their daily needs directly from nature or their own production
They do not purchase or trade products
Capitalist market economy: buyers and sellers interact to determine prices and production of goods and services
Centrally planned economy: the government determines how to allocate resources
Mixed economy: governments intervene in the market

6. Governments intervene in a market economy
In mixed market economies, governments intervene to:
Eliminate unfair advantages held by single buyers or sellers
Provide social services (national defense, medical care, education)
Provide safety nets for elderly, disaster victims, etc.
Manage the commons
Reduce pollution and other threats to health and quality of life

7. The economy relies on the environment
Economies receive inputs (resources)
Process them
Discharge outputs (waste)
Traditional economics ignores the environment
But still drives most policy decisions

8. Environmental view of economics
Human economies are subsets of the environment and depend crucially on it for goods and services

9. Environmental systems support economies
Economic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods”
Ecosystem services: essential services support the life that makes economic activities possible
* Soil formation * Pollination
* Water purification * Nutrient cycling
* Climate regulation * Waste recycling

10. Economic activities affect the environment
Resource depletion and generating pollution reduces the functioning of ecological systems
Degradation of ecosystem services disrupts economies
Pollution depresses economic opportunities
Ecological degradation hurts poor people the most
Restoring ecosystem services is a prime way to alleviate poverty
15 of 24 global ecosystem services are being degraded or used unsustainably

11. Adam Smith’s “invisible hand”
Adam Smith believed that self-interested behavior could benefit society
If laws were followed and markets were competitive
Classical economics: when people pursue economic self-interest in a competitive marketplace …
The market is guided by an “invisible hand” and …
Society benefits
This idea is a pillar of free-market thought today

12. Neoclassical economics includes psychology
Neoclassical economics examines the psychological factors that underlie consumer choices
Market prices reflect consumer preference
Supply vs. demand
Conflict between buyers and sellers leads to ….
Production of the “right” quantities of a product

13. Cost-benefit analysis: evaluating decisions
Cost-benefit analysis: costs of a proposed action are compared to benefits that result from the action
If benefits > costs: pursue the action
But not all costs and benefits can be easily identified, defined, or quantified
It is easy to quantify the cost of pollution-reducing equipment or jobs created by an activity
But hard to assess the effects of pollution on health
Monetary benefits are overrepresented
Analysis is biased in favor of economic development
Biased against environmental protection

14. Neoclassical economics hurts the environment
Capitalist market systems operate according to neoclassical economics
Enormous material wealth has been created
Assumptions of neoclassical economics contribute to environmental degradation:
Resources are infinite or substitutable
We should discount the future
All costs and benefits are internal
All growth is good

15. Assumption: resources are infinite
Economic models treat resources and workers as infinite, substitutable, and interchangeable
Once used up, a replacement resource will be found
Some resources can be replaced but some cannot
Nonrenewable resources (fossil fuels) can be depleted
Renewable resources (forests) can also be used up

16. Assumption: discount long-term effects
A future event has less value than a present one
Future events are discounted:
Short-term costs and benefits are more important than long-term costs and benefits
Present conditions are more important than future ones
We ignore the long-term consequences of policy decisions
Environmental problems unfold gradually
Discounting causes us to downplay environmental impacts of pollution and resource degradation

17. Assumption: costs and benefits are internal
Only the buyer and seller experience costs and benefits associated with exchanging goods or services
Pricing ignores social, environmental, or economic costs of pollution and degradation
Taxpayers bear the burden of paying these costs
External costs: affect people other than buyers or sellers
Health problems, resource depletion, property damage
Ignoring external costs creates a false impression of the consequences of choices
Laws and regulations address external costs

18. People suffer from external costs
People who do not participate in a transaction suffer from external costs (health problems, property and aesthetic damage, stress, lower real estate values)

19. Assumption: all growth is good
Economic growth is needed to keep jobs and social order
It creates opportunities for poor to become wealthier
Progress is measured by economic growth
But economic growth does not ensure well-being
Affluenza: material goods do not always bring contentment to those who can afford them
Runaway growth can destroy our economic system
Resources are ultimately limited

20. We live in a growth-oriented economy
Modern global economic growth is unprecedented
Americans are in a frenzy of consumption
Economic growth comes from:
Increased inputs (labor, natural resources)
Economic development: improved efficiency of production (technology, ideas, equipment)
Uncontrolled economic growth is unsustainable
Technology can push back limits, but not forever
Resources are finite or have limited rates of extraction

21. Is the growth paradigm good for us?
The dramatic rise in per-person consumption has severe environmental consequences

22. Ecological economics
Ecological economics: civilizations cannot overcome environmental limitations
Uses principles of ecology and systems science
Natural systems are models for sustainability
Calls for revolution
Ecological economists advocate steady-state economies:
Economies that mirror natural ecological systems
They don’t grow nor shrink but stay stable
Quality of life increases through technological and behavioral changes 22

23. Environmental economics
Environmental economics: unsustainable economies have high population growth and inefficient resource use
We can attain sustainability within current economic systems
Calls for reform
Economies grow by modifying neoclassical economics to increase efficiency through technology
Environmental economists assign monetary values to ecosystem goods and services
Integrating them into traditional cost-benefit analysis

24. Valuing ecosystem goods and services
The market ignores/undervalues ecosystem services
Nonmarket values: values (e.g., ecological, cultural, spiritual) not included in the price of a good or service
Hard to quantify, since there is no traditional measure of economic worth
Natural cycles are vital to our existence but markets impose no penalties when we disturb them

25. How do we quantify an ecosystem’s value?
Surveys determine how much people are willing to pay to protect or restore a resource
Measure the money, time, or effort expended to travel to parks for recreation
Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet
Measure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution

26. The global value of ecosystem services
The global economic value of 17 ecosystem services equals $46 trillion
More than the GDP of all nations combined
Protecting land gives 100 times more value than converting it to agriculture, logging, or fish farming

27. Businesses are responding to concerns
Industries, businesses, and corporations make money by “greening” their operations
Recycling, cutting energy use, etc., reduces costs, and increases profits
Greenwashing: consumers are misled into thinking companies are acting more sustainably than they are
Example: “Pure” bottled water may not be safer or better
People must support sustainable economics 27

28. Markets can fail Market failure occurs when markets ignore:
The environment’s positive impacts on economies (ecosystem services)
The negative effects of activities on the environment or people (external costs)
Government intervention counters market failure through:
Laws and regulations
Taxing harmful activities
Designing economic incentives to promote fairness, conservation, and sustainability

29. Environmental policy
Once society agrees that a problem exists, it may persuade its leaders to solve it through policy
Policy: a formal set of general plans and principles to address problems and guide decision making
Public policy: governmental laws, regulations, orders, incentives, and practices to advance societal welfare
Environmental policy: pertains to human interactions with the environment
Regulates resource use or reduces pollution
To promote human welfare and/or protect resources

30. Policy impacts environmental problems
Science, ethics, and economics help formulate policy
Science: provides information and analysis
Ethics and economics: clarify how society can address problems
Government interacts with
Citizens, organizations, and the private sector

31. Policies prevent the tragedy of the commons
Capitalist markets are driven by short-term profit
Not long-term social or environmental stability
Little incentive to minimize impacts
Market failure justifies government intervention
Environmental policy tries to protect environmental quality and natural resources
While promoting equity or fairness in resource use
Tragedy of the commons: commonly held resources will become overused and degraded
Best prevented by restriction of use and management

32. Environmental policies prevent free riders and external costs
Free riders: people are tempted to cheat and not participate in sacrificing to protect the environment
An entity gets a “free ride” by avoiding sacrifices made by others
Private voluntary efforts are less effective than public policies, where everyone sacrifices
Environmental policies also promote fairness by eliminating external costs
Policies ensure that parties do not use resources in ways that harm others

33. Framework of U.S. environmental policy
The U.S. is a good model to understand environmental policy
It has pioneered innovative policies
Its policies serve as models for other countries
Understanding federal policy helps us understand it at local, state, and international levels
Congress passes legislation (statutory law)
It is signed into law by the president
Laws are implemented and executed by agencies
Regulations: specific rules to achieve objectives of broadly written statutory laws

34. State and local governmental policies
The structure of the federal government is mirrored at the state level
But state laws cannot violate principles of the U.S. Constitution
If laws conflict, federal laws take precedence
California, New York, New Jersey, and Massachusetts have strong environmental laws
Well-funded agencies
Citizens value protecting the environment

35. Early U.S. environmental policy
From 1780s to the late 1800s, laws promoted settlement and extraction of resources
General Land Ordinances of 1785 and 1787: encouraged people to move west
The federal government managed unsettled lands
Surveying and readying them for sale
Settlement increased prosperity for citizens
Relieved crowding in eastern cities
Displaced millions of Native Americans
People believed the land was infinite and inexhaustible

36. Typical laws from the 1780s to late 1800s
Homestead Act (1862): anyone could buy or settle on 160 acres of public land
Insert Fig. 5.10a

37. Typical laws from the 1780s to late 1800s
General Mining Act (1872): people could mine on public land for $5/acre with no government oversight

38. Typical laws from the 1780s to late 1800s
Timber Culture Act (1873): encouraged the timber industry to clear-cut ancient trees with little government policy to limit logging or encourage conservation

39. The second wave of U.S. policy
Public perception and government policy shifted
Laws addressed problems caused by westward expansion and encouraged conservation
Congress created Yellowstone National Park, the world’s first national park, in 1872
Also, national parks, forests, and wildlife refuges
Understood that the nation’s resources were exhaustible
They required legal protection
Land management policies addressed soil conservation
The 1964 Wilderness Act preserves pristine land

40. The third wave of U.S. environmental policy
In the 20th century, people were better off economically
But lived with dirtier air, dirtier water, and more waste and toxic chemicals
Events increased awareness of environmental problems and shifted public priorities and policies
Rachel Carson’s Silent Spring (1962) described the ecological and health effects of pesticides and chemicals

41. Modern U.S. environmental policy
Ohio’s Cuyahoga River was so polluted that it caught fire in the 1950s and 1960s
The public demanded more environmental protection
Today, U.S. health is better protected and the air and water are cleaner mainly because of policies of the 1960s

42. The National Environmental Policy Act (1970)
NEPA began the modern era of environmental policy
It created the Council on Environmental Quality
Requires an Environmental Impact Statement (EIS)
For any federal action that might significantly impact the environment
To assess the environmental impacts of any federally-funded project
An EIS usually does not halt projects
Provides incentives to decrease damage
Grants citizens input into the policy process

43. The EPA shifts environmental policy
In 1970, President Nixon’s executive order created the Environmental Protection Agency (EPA)
To develop an integrated approach to environmental policy
The EPA:
Conducts and evaluates research
Monitors environmental quality
Sets and enforces standards for pollution levels
Assists states in meeting standards and goals
Educates the public

44. Significant environmental laws
The public demanded a cleaner environment
Environmental problems needed tough regulations
Thousands of laws protect health and environmental quality in the U.S.

45. Environmental policy changes over time
Major advances in environmental policy in the 1960s and 1970s occurred because:
Strong evidence of environmental problems existed
People could visualize policies to deal with problems
The political climate was ripe, with a supportive public and leaders who were willing to act
Pictures of Earth from space made us aware that our planet was finite

46. Many reacted against regulation
By 1990, many felt that regulations were too strict
Imposed economic burdens on people and businesses
George W. Bush and the Republican-controlled Congresses (1994–2006) tried to weaken laws
“The Death of Environmentalism” (2004): the environmental movement has to be reinvented
It must appeal to core values with an inspiring vision
This new outlook helped elect President Obama in 2008

47. Current environmental policy
Other nations have increased attention to issues
The 1992 Earth Summit in Rio de Janeiro, Brazil
The 2002 World Summit on Sustainable Development in Johannesburg, South Africa
This wave of policy focuses on sustainability
Safeguarding ecosystems while raising living standards
Climate change dominates discussion on environmental policy

48. International environmental policy
International law is vital to solving transboundary issues
Customary law: international law arising from long- standing practices or customs held by most cultures
Conventional law: arises from conventions or treaties
Montreal Protocol (1987): 160 nations agreed to reduce ozone-depleting chemicals
Kyoto Protocol: reduces greenhouse gas emissions causing climate change
North American Free Trade Agreement (NAFTA):
Addresses U.S.–Mexico issues

49. Organizations shape international policy
International organizations influence nations through:
Funding, economic or political pressure, and media attention
United Nations (UN): plays an active role in policy
Sponsors conferences, coordinates treaties, publishes research
UNEP (United Nations Environment Programme) promotes sustainability
Research, outreach activities
Provides information to policymakers and scientists

50. The World Bank and European Union
The World Bank: one of the largest funding sources for economic development in poor countries
Dams, irrigation, infrastructure, etc.
Funds unsustainable, environmentally damaging projects
The European Union (EU) seeks to promote Europe’s unity and its economic and social progress
Can sign binding treaties and enact regulations
Sees environmental regulations as barriers to trade

51. The World Trade Organization (WTO)
Represents multinational corporations
Promotes free trade
Can impose penalties on nations that don’t comply with its directives
Interprets environmental laws as unfair barriers to trade
Brazil and Venezuela filed a complaint against U.S. regulations requiring cleaner-burning fuel
The WTO agreed with Brazil and Venezuela, despite threats to human health
Critics charge the WTO aggravates environmental problems 51

52. International treaties can weaken protection
International treaties allow industries and corporations to weaken environmental protection laws
They see laws as barriers to trade
Under NAFTA, investors can sue a country for lost profits
Canada sued the U.S. for $300 million for banning beef after finding mad cow disease in Canada cows
Canada sued the U.S. for $1 billion for banning MTBE, a dangerous gasoline additive
The U.S. forced Mexico to pay $16 million and reopen a toxic waste dump

53. NGOs
Nongovernmental organizations (NGOs): entities that influence international policy
Some do not get politically involved
Example: The Nature Conservancy
Others try to shape policy through research, education, lobbying, or protest
Example: Conservation International, the World Wide Fund for Nature, Greenpeace, Population Connection

54. Seven steps to making environmental policy
Theoretically, in the U.S., everyone has a voice and can make a difference
But money wields influence
Some people and organizations are more influential than others
Creating environmental policy has several steps
Requires initiative, dedication, and the support of many people

55. Step 1: Identify a problem
Requires scientific inquiry and data collection

56. Step 2: Pinpoint causes of the problem
Involves scientific research

57. Step 3: Envision a solution
Science plays a vital role here, too
Solutions also require social or political action

58. Step 4: Get organized
Organizations are more effective than individuals
But a motivated, informed individual can also succeed

59. Step 5: Cultivate access and influence
People gain access to policymakers and influence them through lobbying and campaign contributions
Professional lobbyists are employed by businesses and organizations
Anyone can donate money to a candidate

60. Step 6: Shepherd the solution into law
Prepare a bill, or draft law, containing solutions
Find members of the House and Senate to introduce the bill and shepherd it through committees
The bill may become law or die in various ways

61. How a bill becomes law
Before a bill becomes law, it must clear multiple hurdles

62. Step 7: Implement, assess, and interpret policy
Following a law’s enactment
Administrative agencies implement regulations
Policymakers evaluate the policy’s successes or failures
The courts interpret the law

63. Science plays a role, but can be politicized
A nation’s strength depends on proper use of science
Governments use some tax money to fund research
Sometimes policymakers let ideology determine policy
Politicians ignore scientists and mislead the public
Government scientists have had their work censored, suppressed, or edited and their jobs threatened
Unqualified people are put into powerful positions
Scientifically literate citizens must ensure that our government uses proper use of science
When taxpayer-funded research is suppressed or distorted for political ends, everyone loses

64. Three major types of policy approaches
Environmental policy has 3 major approaches:
Lawsuits
Command-and-control
Economic policy tools

65. Strategy: lawsuits in the courts
Before legislation, lawsuits addressed U.S. policy issues
Individuals suffering from pollution sued polluters in court
Courts make polluters stop or pay fines
Industrialization and population growth made it harder to control pollution
Also, justices were reluctant to hinder industry
People saw legislation and regulation as more effective in protecting health and safety

66. Strategy: command and control
Command-and-control approach: a regulating agency prohibits actions, or sets rules or limits
Threatening punishment for violators
This is the approach used for most environmental laws and regulations enforced by agencies today
This simple approach has worked well
It brings cleaner air, water, safer workplaces, and healthier neighborhoods

67. Strategy: economic policy tools
People don’t like the top-down approaches that dictate particular solutions to problems
Alternative approaches channel innovation and economic policies to benefit the public:
Promote desired, and discourage undesired, outcomes
Encourage market competition to produce new solutions at lower cost
Strategies include:
Green taxes, subsidies, permit trading, and ecolabeling

68. Green taxes discourage unsustainability
Governments use taxes to benefit the public
Internalizing harmful external costs makes them part of the cost of doing business
Green taxes: tax environmentally harmful activities and products
Businesses reimburse the public for damage they cause
The more pollution, the higher the tax payment
Companies have financial incentives to reduce pollution with freedom to decide how to do so
But costs are passed on to consumers

69. Who should pay for pollution?
Green taxes are not widely supported in the U.S.
Other “sin taxes” (e.g., on cigarettes and alcohol) are tools of U.S. social policy
Polluter-pays principle: the party that pollutes is held responsible for covering the costs of its impacts
Widely used in Europe
Carbon taxes: controversial taxes on gasoline, coal-based electricity, and other fossil fuels
Used to fight climate change

70. Subsidies promote certain activities
Subsidy: a government giveaway of cash or resources to encourage a particular industry or activity
Tax break: helps an entity by relieving its tax burden
Subsidies can promote sustainability, but they have been used to support unsustainable activities
The U.S. subsidizes logging, grazing, and mining
Benefits private parties while degrading publically held resources
Nations give $1.45 trillion per year in harmful subsidies
U.S. fossil fuel companies received $72 billion taxpayer money (2002–2008)—renewable energy received $29 billion

71. Permit trading saves money
Permit trading: a government-created market in permits for an environmentally harmful activity
Businesses buy, sell, or trade these permits
Cap-and-trade emissions trading system: the government sets pollution levels (“caps”)
Permits let polluters emit some amount of pollution
Polluters can exchange (sell) permits
The government can set lower emission levels
Companies have an economic incentive to reduce emissions

72. A cap-and-trade system for air pollution
One U.S. cap-and-trade system decreased sulfur dioxide emissions
Cuts were obtained more cheaply than expected
With no effects on electricity supply or economic growth
Billions of dollars per year are saved
Benefits outweigh costs 40 to 1

73. Ecolabeling empowers consumers
Uses the marketplace to counteract market failures
Ecolabeling: tells consumers which brands use environmentally benign processes
Dolphin-safe tuna, labeling recycled paper, etc.
Ecolabeling is a powerful incentive for businesses to change

74. Market incentives work at the local level
Municipalities charge residents for waste disposal
According to the amount of waste generated
Cities tax disposal of costly items (tires, motor oil)
Some cities give rebates for buying water-efficient appliances
Power utilities give discounts to those buying efficient lightbulbs and appliances
It is cheaper than expanding generating capacity

75. Conclusion Environmental policy is a problem-solving tool
It uses science, ethics, and economics
Conventional command-and-control approach uses legislation and regulations to make policy
It is the most common approach
Innovative economic policy tools are being developed
Environmental and ecological economists quantify the value of ecosystem services
Economic well-being does not need a trade-off with environmental quality