Environmental Economics

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Environmental economics

Environmental economics is a relatively new field, but its roots go back to the end of the nineteenth century when economists first discussed the problem of externality . Economic transactions have external effects which are not captured by the price system. Prime examples of these externalities are air pollution and water pollution . The absence of a price for nature's capacity to absorb wastes has an obvious solution in economic theory. Economists advocate the use of surrogate prices in the form of pollution taxes and discharge fees. The non-priced aspect of the transaction then has a price, which sends a signal to the producers to economize on the use of the resource.

In addition to the theory of externalities, economists have recognized that certain goods, such as those provided by nature , are common property. Lacking a discrete owner, they are likely to be over-utilized. Ultimately, they will be depleted. Few will be left for future generations , unless common property goods like the air and water are protected.

Besides pollution taxes and discharge fees, economists have explored the use of marketable emission permits as a means of rectifying the market imperfection caused by pollution. Rather than establishing a unit charge for pollution, government would issue permits equivalent to an agreed-upon environmental standard. Holders of the permits would have the right to sell them to the highest bidder. The advantage of this system, wherein a market for pollution rights has been established, is that it achieves environmental quality standards. Under a charge system, trial-and-error tinkering would be necessary to achieve the standards.

Besides discharge fees and markets for pollution rights, economists have advocated the use of cost-benefit analysis in environmental decision making. Since control costs are much easier to measure than pollution benefits, economists have concentrated on how best to estimate the benefits of a clean environment . They have relied on two primary means of doing so. First, they have inferred from the actual decisions people make in the marketplace what value they place on a clean and healthy environment. Second, they have directly asked people to make trade-off choices. The inference method might rely on residential property values, decomposing the price of a house into individual attributes including air quality , or it might rely on the wage premium risky jobs enjoy. Despite many advances, the problem of valuing environmental benefits continues to be controversial with special difficulties surrounding the issues of quantifying the value of a human life, recreational benefits, and ecological benefits including species and habitat survival.

For instance, the question of how much a life is worth is repellent and absurd since human worth cannot be truly captured in monetary terms. Nonetheless it is important to determine the benefits for cost-benefit purposes. The costs of reducing pollution often are immediate and apparent, while the benefits are far-off and hard to determine. So, it is important to try to gauge what these benefits might be worth.

Economists call for a more rational ordering of risks. The funds for risk reduction are not limitless, and the costs keep mounting. Risks should be viewed in a detached and analytical way. Polls suggest that Americans worry most about such dangers as oil spills , acid rain , pesticides, nuclear power , and hazardous wastes, but scientific risk assessments show that these are only low or medium-level dangers. The greater hazards come from radon , lead , indoor air pollution, and fumes from chemicals such as benzene and formaldehyde. Radon, the odorless gas that naturally seeps up from the ground and is found in people's homes, causes as many as 20,000 lung cancer deaths per year, while hazardous waste dumps cause at most 500 cancer deaths. Yet the Environmental Protection Agency (EPA) spends over $6 billion a year to clean up hazardous waste sites while its spends only $100 million a year for radon protection. To test a home for radon costs about $25, and to clean it up if it is found contaminated costs $1,000. To make the entire national housing stock free from radon would cost a few billion dollars. In contrast, projected spending for cleaning up hazardous waste sites is likely to exceed $500 billion despite the fact that only about 11 percent of such sites pose a measurable risk to human health.

Greater rationality would mean that less attention would be paid to some risks and more attention to others. For instance, scientific risk assessment suggests that sizable new investments will be needed to address the dangers of ozone layer depletion and greenhouse warming. Ozone depletion is likely to result in 100,000 more cases of skin cancer by the year 2050. Global warming has the potential to cause massive catastrophe.

For businesses, risk assessment provides a way to allocate costs efficiently. They are increasingly using it as a management tool. To avoid another accident like Bhopal, India , Union Carbide has set up a system by which it rates its plants "safe," "made safer," or "shut down." Environmentalists, on the other hand, generally see risk assessment as a tactic of powerful interests used to prevent regulation of known dangers or permit building of facilities where there will be known fatalities. Even if the chances of someone contracting cancer and dying is only one in a million, still someone will perish, which the studies by risk assessors indeed document. Among particularly vulnerable groups of the population (allergy sufferers exposed to benzene for example) the risks are likely to be much greater, perhaps as great as one fatality for every 100 persons. Environmentalists conclude that the way economists present their findings is too conservative. By treating everyone alike, they overlook the real danger to particularly vulnerable people. Risk assessment should not be used as an excuse for inaction.

Environmentalists have also criticized environmental economics for its emphasis on economic growth without considering the unintended side-effects. Economists need to supplement estimates of the economic costs and benefits of growth with estimates of the effects of that growth that cannot be measured in economic terms. Many environmentalists also believe that the burden of proof should rest with new technologies, in that they should not be allowed simply because they advance material progress. In affluent societies especially, economic expansion is not necessary.

Growth is promoted for many reasons to restore the balance of payments, to make the nation more competitive, to create jobs, to reduce the deficit, to provide for the old and sick, and to lessen poverty. The public is encouraged to focus on statistics on productivity, balance of payments, and growth, while ignoring the obvious costs. Environmental groups, on the other hand, have argued for a steady-state economy in which population and per capita resource consumption stabilize. It is an economy with a constant number of people and goods, maintained at the lowest feasible flows of matter and energy. Human services would play a large role in a steady-state economy because they do not require much energy or material throughput and yet contribute to economic growth. Environmental clean-up and energy conservation also would contribute, since they add to economic growth while also having a positive effect on the environment.

Growth can continue, according to environmentalists, but only if the forms of growth are carefully chosen. Free time, in addition, would have to be a larger component of an environmentally-acceptable future economy. Free time removes people from potentially harmful production. It also provides them with the time needed to implement alternative production processes and techniques, including organic gardening , recycling , public transportation , and home and appliance maintenance for the purposes of energy conservation .

Another requirement of an environmentally acceptable economy is that people accept a new frugality, a concept that also has been labeled joyous austerity, voluntary simplicity, and conspicuous frugality.

Economists represent the environment's interaction with the economy as a materials balance model. The production sector, which consists of mines and factories, extracts materials from nature and processes them into goods and services. Transportation and distribution networks move and store the finished products before they reach the point of consumption. The environment provides the material inputs needed to sustain economic activity and carries away the wastes generated by it. People have long recognized that nature is a source of material inputs to the economy, but they have been less aware that the environment plays an essential role as a receptacle for society's unwanted by-products. Some wastes are recovered by recycling, but most are absorbed by the environment. They are dumped in landfills, treated in incinerators, and disposed of as ash. They end up in the air, water, or soil .

The ultimate limits to economic growth do not come only from the availability of raw materials from nature. Na ture's limited capacities to absorb wastes also set a limit on the economy's ability to produce. Energy plays a role in this process. It helps make food, forest products, chemicals, petroleum products, metals, and structural materials such as stone, steel, and cement. It supports materials processing by providing electricity, heating, and cooling services. It aids in transportation and distribution. According to the law of the conservation of energy, the material inputs and energy that enter the economy cannot be destroyed. Rather they change form, finding their way back to nature in a disorganized state as unwanted and perhaps dangerous by-products.

Environmentalists use the laws of physics (the notion of entropy) to show how society systematically dissipates low entropy, highly concentrated forms of energy by converting it to high entropy, little concentrated waste that cannot be used again except at very high cost. They project current resource use and environmental degradation into the future to demonstrate that civilization is running out of critical resources. The earth cannot tolerate additional contaminants. Human intervention in the form of technological innovation and capital investment complemented by substantial human ingenuity and creativity is insufficient to prevent this outcome unless drastic steps are taken soon. Nearly every economic benefit has an environmental cost, and the sum total of the costs in an affluent society often exceed the benefits. The notion of carrying capacity is used to show that the earth has a limited ability to tolerate the disposal of contaminants and the depletion of resources.

Economists counter these claims by arguing that limits to growth can be overcome by human ingenuity, that benefits afforded by environmental protection have a cost, and that government programs to clean up the environment are as likely to fail as the market forces that produce pollution. The traditional economic view is that production is a function of labor and capital and, in theory, that resources are not necessary since labor and/or capital are infinitely substitutable for resources. Impending resource scarcity results in price increases which lead to technological substitution of capital, labor, or other resources for those that are in scarce supply. Price increases also create pressures for efficiency-in-use, leading to reduced consumption. Thus, resource scarcity is reflected in the price of a given commodity. As resources become scarce, their prices rise accordingly. Increases in price induce substitution and technological innovation.

People turn to less scarce resources that fulfill the same basic technological and economic needs provided by the resources no longer available in large quantities. To a large extent, the energy crises of the 1970s (the 1973 price shock induced by the Arab oil embargo and 1979 price shock following the Iranian Revolution) were alleviated by these very processes: higher prices leading to the discovery of additional supply and to conservation. By 1985, energy prices in real terms were lower than they were in 1973.

Humans respond to signals about scarcity and degradation. Extrapolating past consumption patterns into the future without considering the human response is likely to be a futile exercise, economists argue. As far back as the end of the eighteenth century, thinkers such as Thomas Malthus have made predictions about the limits to growth, but the lesson of modern history is one of technological innovation and substitution in response to price and other societal signals, not one of calamity brought about by resource exhaustion. In general, the prices of natural resources have been declining despite increased production and demand. Prices have fallen because of discoveries of new resources and because of innovations in the extraction and refinement process.

[Alfred A. Marcus ]