Nature, Scope and Key Concepts in Environmental Economics

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

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

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

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

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)

Drivers of Environmental Change Demographic Developments Urbanisation Economic Growth

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

Urbanisation Worlds population is becoming increasingly urbanised. In 1970 36% 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

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

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

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

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

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

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

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

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

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

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

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)

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

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