Environmental economics is a sub-field of economics concerned with environmental issues. It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local environmental policies around the world. ... Particular issues include the costs and benefits of alternative environmental policies to deal with

air pollution Air pollution is the contamination of air due to the presence of substances in the atmosphere that are harmful to the health of humans and other living beings, or cause damage to the climate or to materials. There are many different type ...

, water quality, toxic substances, solid waste, and global warming." Environmental economics is distinguished from ecological economics in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving natural capital. One survey of German economists found that ecological and environmental economics are different

schools of economic thought In the history of economic thought, a school of economic thought is a group of economic thinkers who share or shared a common perspective on the way economies work. While economists do not always fit into particular schools, particularly in modern ...

, with ecological economists emphasizing "strong" sustainability and rejecting the proposition that human-made ("physical") capital can substitute for natural capital.

History

The modern field of environmental economics has been traced to the 1960s. with significant contribution from Post-Keynesian economist

Paul Davidson (economist) Paul Davidson (born October 23, 1930) is an American macroeconomist who has been one of the leading spokesmen of the American branch of the post-Keynesian school in economics. He is a prolific writer and has actively intervened in important debat ...

who had just completed a management position with the

Continental Oil Conoco Inc. ( ) was an American oil and gas company that operated from 1875 until 2002, when it merged with Phillips Petroleum to form ConocoPhillips. Founded by Isaac Elder Blake in 1875 as the "Continental Oil and Transportation Company". Curre ...

Company.

Topics and concepts

Market failure

Central to environmental economics is the concept of market failure. Market failure means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007): "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." This results in a inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability and non-rivalry.

Externality

An externality exists when a person makes a choice that affects other people in a way that is not accounted for in the market price. An externality can be positive or negative but is usually associated with negative externalities in environmental economics. For instance, water seepage in residential buildings occurring in upper floors affect the lower floors. Another example concerns how the sale of Amazon timber disregards the amount of carbon dioxide released in the cutting. Or a firm emitting pollution will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced by

Kenneth Arrow Kenneth Joseph Arrow (23 August 1921 – 21 February 2017) was an American economist, mathematician, writer, and political theorist. He was the joint winner of the Nobel Memorial Prize in Economic Sciences with John Hicks in 1972. In economi ...

and James Meade is provided by Heller and Starrett (1976), who define an externality as "a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of

Pareto efficiency Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engine ...

". In economic terminology, externalities are examples of market failures, in which the unfettered market does not lead to an efficient outcome.

Common goods and public goods

When it is too costly to exclude some people from access to an environmental resource, the resource is either called a

common property resource In economics, a common-pool resource (CPR) is a type of good consisting of a natural or human-made resource system (e.g. an irrigation system or fishing grounds), whose size or characteristics makes it costly, but not impossible, to exclude potenti ...

(when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or a public good (when use of the resource is

non-rivalrous In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is conside ...

). In either case of non-exclusion, market allocation is likely to be inefficient. These challenges have long been recognized. Hardin's (1968) concept of the

tragedy of the commons Tragedy (from the grc-gre, τραγῳδία, ''tragōidia'', ''tragōidia'') is a genre of drama based on human suffering and, mainly, the terrible or sorrowful events that befall a main character. Traditionally, the intention of tragedy ...

popularized the challenges involved in non-exclusion and common property. "Commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.Ostrom, E. 1990. Governing the Commons. Cambridge: Cambridge University Press. The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, over harvesting a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to environmental degradation. See, however,

Ostrom Ostrom or Öström is a Swedish surname meaning "island stream". Many of the Ostroms in North America are descendants of a Dutch immigrant to New Amsterdam in the 1600's. The name was van Oosteroom and originated in the area of Utrecht and sever ...

's (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons. The mitigation of climate change effects is an example of a public good, where the social benefits are not reflected completely in the market price. Because the personal marginal benefits are less than the social benefits the market under-provides climate change mitigation. This is a public good since the risks of climate change are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions as they will have global consequences from which no one can be excluded. A country's incentive to invest in carbon abatement is reduced because it can " free ride" off the efforts of other countries. Over a century ago, Swedish economist Knut Wicksell (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them. Image:Nitrogen_Cycle.jpg, Nitrogen cycle Image:Water cycle.png, Water cycle Image:Carbon cycle-cute diagram.svg,

Carbon cycle The carbon cycle is the biogeochemical cycle by which carbon is exchanged among the biosphere, pedosphere, geosphere, hydrosphere, and atmosphere of the Earth. Carbon is the main component of biological compounds as well as a major componen ...

Image:Oxygen Cycle.jpg,

Oxygen cycle Oxygen cycle refers to the movement of oxygen through the atmosphere (air), biosphere (plants and animals) and the lithosphere (the Earth’s crust). The oxygen cycle demonstrates how free oxygen is made available in each of these regions, as wel ...

Valuation

Assessing the economic value of the environment is a major topic within the field. The values of natural resources often are not reflected in prices that markets set and, in fact, many of them are available at no monetary charge. This mismatch frequently causes distortions in pricing of natural assets: both overuse of them and underinvestment in them. Economic value or tangible benefits of

ecosystem services Ecosystem services are the many and varied benefits to humans provided by the natural environment and healthy ecosystems. Such ecosystems include, for example, agroecosystems, forest ecosystem, grassland ecosystems, and aquatic ecosystems. ...

and, more generally, of natural resources, include both use and indirect (see the nature section of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children. Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking recreational trips or using hedonic methods in which values are estimated based on observed prices. Non-use values are usually estimated using stated preference methods such as

contingent valuation Contingent valuation is a survey-based economic technique for the valuation of non- market resources, such as environmental preservation or the impact of externalities like pollution. While these resources do give people utility, certain aspec ...

choice modelling Choice modelling attempts to model the decision process of an individual or segment via revealed preferences or stated preferences made in a particular context or contexts. Typically, it attempts to use discrete choices (A over B; B over A, B & C) i ...

. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment ( willingness to pay) or their willingness to accept (WTA) compensation for the destruction of the environmental good. Hedonic pricing examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.

State subsidy

Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year.

Solutions

Solutions advocated to correct such externalities include: * ''

Environmental regulations Environmental law is a collective term encompassing aspects of the law that provide protection to the environment. A related but distinct set of regulatory regimes, now strongly influenced by environmental legal principles, focus on the manage ...

''. Under this plan, the economic impact has to be estimated by the regulator. Usually, this is done using cost-benefit analysis. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions, i.e., some firms, in this system, can abate pollution inexpensively, while others can only abate it at high cost. Because of this, the total abatement in the system comprises some expensive and some inexpensive efforts. Consequently, modern "Command and control" regulations are oftentimes designed in a way that addresses these issues by incorporating utility parameters. For instance, CO₂ emission standards for specific manufacturers in the automotive industry are either linked to the average vehicle footprint (US system) or average vehicle weight (EU system) of their entire vehicle fleet. Environmental economic regulations find the cheapest emission abatement efforts first, and then move on to the more expensive methods. E.g. as said earlier, trading, in the quota system, means a firm only abates pollution if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole. * '' Quotas on pollution''. Often it is advocated that pollution reductions should be achieved by way of tradeable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction, i.e., only if buying tradeable permits from another firm(s) is costlier. In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems. * '' Taxes and tariffs on pollution''. Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive", that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. This concept was introduced by

Arthur Pigou Arthur Cecil Pigou (; 18 November 1877 – 7 March 1959) was an English economist. As a teacher and builder of the School of Economics at the University of Cambridge, he trained and influenced many Cambridge economists who went on to take chair ...

, a British economist active in the late nineteenth through the mid-twentieth century. He showed that these externalities occur when markets fail, meaning they do not naturally produce the socially optimal amount of a good or service. He argued that “a tax on the production of paint would encourage the ollutingfactory to reduce production to the amount best for society as a whole.” These taxes are known amongst economists as Pigouvian Taxes, and they regularly implemented where negative externalities are present. Some advocate a major shift from taxation from income and sales taxes to tax on pollution - the so-called "

green tax shift An environmental tax, ecotax (short for ecological taxation), or green tax is a tax levied on activities which are considered to be harmful to the environment and is intended to promote environmentally friendly activities via economic incentives. ...

". * ''Better defined property rights''. The

Coase Theorem In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low tran ...

states that assigning property rights will lead to an optimal solution, regardless of who receives them, if

transaction cost In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pr ...

s are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if the government itself did not act (an early example of

bioregional democracy Bioregionalism is a philosophy that suggests that political, cultural, and economic systems are more sustainable and just if they are organized around naturally defined areas called bioregions, similar to ecoregions. Bioregions are defined throu ...

). Many markets for "pollution rights" have been created in the late twentieth century—see emissions trading. According to the Coase Theorem, the involved parties will bargain with each other, which results in an efficient solution. However, modern economic theory has shown that the presence of asymmetric information may lead to inefficient bargaining outcomes. Specifically, Rob (1989) has shown that pollution claim settlements will not lead to the socially optimal outcome when the individuals that will be affected by pollution have learned private information about their disutility already before the negotiations take place. Goldlücke and Schmitz (2018) have shown that inefficiencies may also result if the parties learn their private information only after the negotiations, provided that the feasible transfer payments are bounded. Using cooperative game theory, Gonzalez, Marciano and Solal (2019) have shown that in social cost problems involving more than three agents, the Coase theorem suffers from many counterexamples and that only two types of property rights lead to an optimal solution. * ''Accounting for environmental externalities in the final price''. In fact, the world's largest industries burn about $7.3 trillion of free natural capital per year. Thus, the world's largest industries would hardly be profitable if they had to pay for this destruction of natural capital. Trucost has assessed over 100 direct environmental impacts and condensed them into 6 key environmental performance indicators (EKPIs). The assessment of environmental impacts is derived from different sources (academic journals, governments, studies, etc.) due to the lack of market prices. The table below gives an overview of the 5 regional sectors per EKPI with the highest impact on the overall EKPI: If companies are allowed to include some of these externalities in their final prices, this could undermine the Jevons paradox and provide enough revenue to help companies innovate.

Relationship to other fields

Environmental economics is related to ecological economics but there are differences. Most environmental economists have been trained as economists. They apply the tools of economics to address environmental problems, many of which are related to so-called market failures—circumstances wherein the " invisible hand" of economics is unreliable. Most ecological economists have been trained as ecologists, but have expanded the scope of their work to consider the impacts of humans and their economic activity on ecological systems and services, and vice versa. This field takes as its premise that economics is a strict subfield of ecology. Ecological economics is sometimes described as taking a more pluralistic approach to environmental problems and focuses more explicitly on long-term environmental sustainability and issues of scale. Environmental economics is viewed as more idealistic in a price system; ecological economics as more realistic in its attempts to integrate elements outside of the price system as primary arbiters of decisions. These two groups of specialists sometimes have conflicting views which may be traced to the different philosophical underpinnings. Another context in which

externalities In economics, an externality or external cost is an indirect cost or benefit to an uninvolved third party that arises as an effect of another party's (or parties') activity. Externalities can be considered as unpriced goods involved in either c ...

apply is when globalization permits one player in a market who is unconcerned with

biodiversity Biodiversity or biological diversity is the variety and variability of life on Earth. Biodiversity is a measure of variation at the genetic (''genetic variability''), species (''species diversity''), and ecosystem (''ecosystem diversity'') le ...

to undercut prices of another who is - creating a

race to the bottom Race to the bottom is a socio-economic phrase to describe either government deregulation of the business environment or reduction in corporate tax rates, in order to attract or retain usually foreign economic activity in their jurisdictions. While ...

in regulations and conservation. This, in turn, may cause loss of natural capital with consequent erosion, water purity problems, diseases, desertification, and other outcomes that are not efficient in an economic sense. This concern is related to the subfield of sustainable development and its political relation, the anti-globalization movement. Image:Sustainable development.svg, The three pillars of sustainability (clickable), 300px, thumb poly 138 194 148 219 164 240 182 257 219 277 263 291 261 311 264 331 272 351 283 366 300 383 316 394 287 408 261 417 224 424 182 426 154 423 119 415 87 403 58 385 40 368 24 347 17 328 13 309 16 286 26 263 43 240 64 224 84 212 107 202

Environment Environment most often refers to: __NOTOC__ * Natural environment, all living and non-living things occurring naturally * Biophysical environment, the physical and biological factors along with their chemical interactions that affect an organism or ...

poly 324 219 334 226 343 234 351 242 359 251 366 263 371 276 375 287 400 279 417 272 438 263 453 252 466 241 477 229 488 214 497 193 482 189 463 188 423 188 398 191 376 196 352 204 Equitable poly 319 221 330 229 337 235 347 244 357 258 365 270 371 287 358 289 344 291 321 292 303 292 284 290 268 288 272 275 278 261 287 249 297 239 Sustainable poly 142 192 167 188 185 187 211 187 235 190 263 196 286 203 304 212 316 219 305 227 295 236 285 246 276 259 269 272 264 287 249 284 229 277 208 268 190 256 172 242 158 226 149 212 Bearable (Social ecology) poly 267 291 265 304 267 320 275 345 284 360 293 371 304 381 319 392 332 384 343 374 354 362 364 347 371 332 373 317 374 305 372 292 362 293 344 295 323 296 301 296 286 294 Viable poly 501 193 519 197 541 205 561 215 582 228 604 248 616 267 623 286 626 305 623 326 617 343 607 359 596 373 580 386 563 397 538 409 517 417 494 422 468 425 432 426 413 424 396 421 375 416 353 409 335 401 323 394 335 386 349 372 360 359 374 331 377 313 377 299 376 290 388 288 410 280 458 256 481 233 Economic poly 141 188 139 173 143 147 152 126 169 107 191 88 216 75 242 65 280 55 310 53 352 54 379 60 415 71 447 88 461 99 475 112 488 128 496 147 500 162 500 176 500 189 471 185 452 183 410 185 369 194 337 206 319 216 305 208 279 197 257 191 230 185 199 183 199 182 199 183 Social Environmental economics was once distinct from

resource economics Natural resource economics deals with the supply, demand, and allocation of the Earth's natural resources. One main objective of natural resource economics is to better understand the role of natural resources in the economy in order to deve ...

. Natural resource economics as a subfield began when the main concern of researchers was the optimal commercial exploitation of natural resource stocks. But resource managers and policy-makers eventually began to pay attention to the broader importance of natural resources (e.g. values of fish and trees beyond just their commercial exploitation). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated with sustainability. Many of the more radical

green economists A green economy is an economy that aims at reducing environmental risks and ecological scarcities, and that aims for sustainable development without degrading the environment. It is closely related with ecological economics, but has a more politi ...

split off to work on an alternate

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour m ...

. Environmental economics was a major influence on the theories of

natural capitalism ''Natural Capitalism: Creating the Next Industrial Revolution'' is a 1999 book on environmental economics co-authored by Paul Hawken, Amory Lovins and Hunter Lovins. It has been translated into a dozen languages and was the subject of a Harvard ...

and environmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the

value of biodiversity Biodiversity or biological diversity is the variety and variability of life on Earth. Biodiversity is a measure of variation at the genetic (''genetic variability''), species (''species diversity''), and ecosystem (''ecosystem diversity'') le ...

to humans, respectively. The theory of

(Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with physical capital. The more radical green economists reject neoclassical economics in favour of a new political economy beyond

capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private pr ...

or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson. This political group is a proponent of a transition to renewable energy. These more radical approaches would imply changes to

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...

and likely also a

so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the

arbitrage In economics and finance, arbitrage (, ) is the practice of taking advantage of a difference in prices in two or more markets; striking a combination of matching deals to capitalise on the difference, the profit being the difference between t ...

normally possible under

. An emerging sub-field of environmental economics studies its intersection with development economics. Dubbed "envirodevonomics" by Michael Greenstone and B. Kelsey Jack in their paper "Envirodevonomics: A Research Agenda for a Young Field", the sub-field is primarily interested in studying "why environmental quality sso poor in developing countries." A strategy for better understanding this correlation between a country's GDP and its environmental quality involves analyzing how many of the central concepts of environmental economics, including market failures, externalities, and willingness to pay, may be complicated by the particular problems facing developing countries, such as political issues, lack of infrastructure, or inadequate financing tools, among many others. In the field of law and economics, environmental law is studied from an economic perspective. The economic analysis of environmental law studies instruments such as zoning, expropriation, licensing, third party liability, safety regulation, mandatory insurance, and criminal sanctions. A book by Michael Faure (2003) surveys this literature.

Professional bodies

The main academic and professional organizations for the discipline of Environmental Economics are the

Association of Environmental and Resource Economists The Association of Environmental and Resource Economists (AERE) was founded in 1979 in the United States as a means of exchanging ideas, stimulating research, and promoting graduate training in environmental and natural resource economics. The major ...

(AERE) and th
European Association for Environmental and Resource Economics (EAERE)
The main academic and professional organization for the discipline of Ecological Economics is the International Society for Ecological Economics (ISEE). The main organization for Green Economics is th
Green Economics Institute

Notes

References

Allen V. Kneese Allan Victor Kneese (5 April 1930, Fredericksburg, Texas - 14 March 2001) was a pioneer in what came to be called environmental economics. He worked at Resources for the Future from 1961 onwards. He earned a master's degree from the University of ...

and Clifford S. Russell (1987). "environmental economics," '' The New Palgrave: A Dictionary of Economics'', v. 2, pp. 159–64. * Robert N. Stavins (2008). "environmental economics," ''

The New Palgrave Dictionary of Economics ''The New Palgrave Dictionary of Economics'' (2018), 3rd ed., is a twenty-volume reference work on economics published by Palgrave Macmillan. It contains around 3,000 entries, including many classic essays from the original Inglis Palgrave Dictio ...

'', 2nd Edition
Abstract & article.
* Maureen L. Cropper and Wallace E. Oates (1992). "Environmental Economics: A Survey," ''Journal of Economic Literature'', 30(2), pp
675-740
press +). * * Tausch, Arno, ‘Smart Development’. An Essay on a New Political Economy of the Environment (March 22, 2016). Available at SSRN: https://ssrn.com/abstract=2752988 or https://dx.doi.org/10.2139/ssrn.2752988 * UNEP (2007). Guidelines for Conducting Economic Valuation of Coastal Ecosystem Goods and Services

* UNEP (2007). Procedure for Determination of National and Regional Economic Values for Ecotone Goods and Services, and Total Economic Values of Coastal Habitats in the context of the UNEP/GEF Project Entitled: “Reversing Environmental Degradation Trends in the South China Sea and Gulf of Thailand”

* *