Ch. 26 Economics and the Environment

Economy Economic Resources System of production, distribution and consumption of goods and services that satisfies people’s wants or needs Economic Resources Natural resources Human resources Financial resources Manufactured resources

Economic Systems Command and Market Command – Government makes all economic decisions Two types of Market systems Pure Free Market – All economic decisions are based solely on competitive interactions of demand, supply and price. All other factors are constant. Capitalist Market – Reality based, designed to subvert many of the theoretical conditions of the Pure Free Market

Economists and the Environmental Viewpoint Conventional Economists - Environment is a subsystem of the economy Natural resources are important but not vital – can find substitutes Because of human ingenuity – depletion and degradation of natural resources will not hinder economic growth

Figure 26-6 Page 694 Capitalist Market Economic System Flow of money Money flows from households to businesses to pay for products Products flow from businesses to households Flow of products Households Businesses Flow of factors of production Labor and other factors of production flow from households to businesses Money flows from businesses to households to pay for labor and other production Flow of money

Ecological Economist - Economy is a subsystem of the environment Natural resources are vital Conventional economic growth is unsustainable because it depletes or degrades the environment on which it depends Integrates ecology with economy

Figure 26-7 Page 694 sun EARTH Heat Economic Systems Natural Depletion of nonrenewable resources Natural Capital Production Air; water, land, soil, biodiversity, minerals, raw materials, energy resources, and dilution, degradation, and recycling services Degradation and depletion of renewable resources used faster than replenished Consumption Pollution and waste from overloading nature’s waste disposal and recycling systems Figure 26-7 Page 694 Recycling and reuse

Eco - economy Uses renewable solar energy Mimics nutrient cycles by replenishing nutrients, disposes of waste, pollution prevention based on reuse and recycling Doesn’t deplete the earths net primary productivity Does not exceed the sustainable yields of ecosystems that support all economies Preserves biodiversity Stabilizes population growth to be “in-balance” with resource consumption

What will it take? Use ecological indicators to monitor economic and ecological health Pricing that includes harmful environmental effects Shift subsidies – reward sustainability, discourage harmful forms of growth Shift taxes to pollution and waste from income and wealth Use eco-labeling to identify environmentally friendly products and services

Figure 26-8 Page 695 Characteristic Unsustainable Economic Growth Environmentally Sustainable Economic Development Production emphasis Natural resources Resource productivity Resource throughput Resource type emphasized Resource fate Pollution control Guiding principles Quantity Not very important Inefficient (high waste) High Nonrenewable Matter discarded Cleanup (output reduction) Risk–benefit analysis Quality Very important Efficient (low waste) Low Renewable Matter recycled, reused, or composted Prevention (input reduction) Prevention and precaution Figure 26-8 Page 695

Reasons GNI(P) and GDP are poor measures of economic and environmental health and human well-being They hide the harmful environmental and social effects of producing goods and services They do not include the depletion and degradation of natural resources or assets on which all economies depend They do not include many beneficial transactions that meet basic needs in which no money changes hands They hide enormous waste of natural and human resources because they measure only money spent, not value received They tell us nothing about income distribution and economic justice

Costs and Pricing Internal Costs - All of the costs associated with manufacturing, marketing, maintaining, delivery, and sales of goods or services. External Costs - Harmful effects of producing the goods and services, such as depletion of non-renewable resources, production of solid and hazardous waste, air and water pollution, land disruption, reduction of biodiversity, and contributions to climate change.

Full-cost Pricing Results of internalizing external costs Currently dealing with harmful external costs by: Levy taxes Pass laws and develop regulations Provide subsidies Using strategies that encourage or force producers to include most, if not all, of the costs in their market price

Results of full-cost pricing Prevention would be more profitable than clean-up Waste reduction, recycling and reuse would be more profitable than dealing with the waste after the fact.

Bad news: Market prices for most things would rise Government would have to reduce taxes for consumers, and stop subsidies for producers to off-set rise in prices Good news: Overall price will be the same. More information on products for consideration by consumers Encourages more resource-efficient and less-polluting methods of production More “Green” products

What’s Holding us back? Many producers of wasteful or harmful products would price themselves out of business Producers would have to give up current subsidies that support the ability to hide harmful external costs Prices of harmful but desirable goods and services would rise Hard to put a price tag on many harmful environmental and health costs. Many are unaware they are paying external costs

Economics of Pollution Cost of removing pollutants goes up as we try to remove all pollutants. At some point the cost of pollution control is greater than the harmful costs of pollution to society Very difficult to determine the actual harmful costs of pollution

Assigning monetary values to resources and pollution costs Mitigation costs- Costs of offsetting the damages Willingness to pay - Survey public as to how much they would pay to avoid the problem Maintenance and protection costs - Cost of protecting the quality of various natural resources

Costs Associated with Pollution Direct costs Associated with prevention or clean-up. Indirect costs Incurred by governments in regulating pollution and damages to private revenues affected by pollution. Repercussion costs Costs to polluting company because of image damage.

Factors affecting how a natural resource is used or managed Discount rates Time preferences Opportunity costs Gov’t subsidies and tax breaks Taxes Ethics

Benefit-Cost Analysis Compares the estimated short-term and long-term benefits and costs for various courses of action Issues with the benefit-cost analysis Who benefits and who is harmed? Many things we value cannot be reduced to monetary value. Can be manipulated to desired outcome for either side of the issue.

Using Regulation and Market Forces to Improve Environmental Quality. Regulations - set pollution standards, regulate harmful activities, ban release of toxic materials, protect finite resources Need to be “innovation-friendly” Emphasize pollution control and waste reduction Requires affected parties to participate in the developing regulations and timetables Sets goals, but allows freedom in meeting those goals Sets strict enough standards to promote real innovation Establishes well-defined deadlines Uses market incentives to encourage compliance and innovation

What we reward, we tend to get more of, and what we discourage we tend to get less of. Economic Incentives - rewards Phase in government subsidies and tax breaks that encourage environmentally beneficial behavior and phase out those that encourage harmful behaviors Eco-labeling – encourages development of green products and services and helps consumers make decisions.

Economic disincentives - punishments Green taxes or effluent fees – used as a tax shift, not an additional burden. User fees – for removal of materials from, or use of public lands Posting pollution-prevention bonds for new major projects

Tradable Pollution and Resource Rights Government sets total limit on emissions or resource use Issue permits or auction off to manufacturers or users Permit holders can: Use as credit against future expansion Use it in another part of their operation Sell it to other companies

Table 26-1 Economic Solutions to Pollution and Resource Use Pg. 706

Resistance to Change Management Innovation-Directed Management Figure 26-12 Page 706 Phase 1 Phase 2 Pollution control and confrontation Acceptance without innovation Innovation-Directed Management Phase 3 Total quality management Pollution prevention and increased resource productivity Phase 4 Life cycle management Product stewardship and selling services instead of things Phase 5 Process design management Clean technology Phase 6 Total life quality management Ecoindustrial webs, environmentally sustainable economies and societies

Reducing Poverty to Improve Environmental Quality and Well-being Causes premature deaths and preventable health problems Increases birthrates Pushes the poor to use resources unsustainably to survive

Richest fifth 85% Poorest fifth 1.3% Figure 26-13 Page 708

How can we reduce poverty? Developing countries governments policy changes: Shift more of the national budget to help rural and urban poor work their way out of poverty Give villages, villagers, and urban poor title to common land and to the crops and trees they plant on them.

Developed Countries could: Forgive at least 60% of the debt form developing countries Increase nonmilitary government and private aid directly to the poor from developing countries, to make them more self-reliant. Encourage banks and other organizations to make small loans to those poor wanting to increase their income Require international lending agencies to use standard environmental and social impact analysis to evaluate and proposed development project before it is funded Carefully monitor all projects, and halt funding if environmental safeguards are not followed Help developing countries increase resource productivity Establish policies that stabilize populations of all countries

Figure 26-14 Page 710 Economics Environmentally Sustainable Economy (Eco-Economy) Resource Use and Pollution Reward (subsidize) earth- sustaining behavior Penalize (tax and do not subsidize) earth- degrading behavior Tax pollution and waste instead of wages and profits Use full-cost pricing Sell more services instead of more things Do not deplete natural capital Live off income from natural capital Reduce poverty Reduce resource use and waste by refusing, reducing, reusing, and recycling Improve energy efficiency Rely more on renewable solar and geothermal energy Shift from a carbon based (fossil fuel) economy to a solar–hydrogen based economy Ecology and Population Mimic nature Preserve biodiversity Repair ecological damage Stabilize population by reducing fertility

Eco-Friendly Business Sunset Business Eco-Friendly Business Figure 26-15 Page 711 Coal mining Oil production Nuclear power Energy-wasting motor vehicles Mining Throwaway products Clearcut logging Paper production Conventional pesticide production Unsustainable farming Water well drilling Conventional economics Conventional engineering, design, and architecture Business travel Solar cell production Hydrogen production Fuel-cell production Wind turbine production Wind farm construction Geothermal energy production Production of energy- efficient fuel-cell cars, trucks, and buses Conventional and electric bicycle production Light-rail construction Sustainable agriculture Integrated pest Management Agriculture Recycling, reuse, and composting Soil conservation Water conservation Pollution prevention Ecoindustrial design Biodiversity management and protection Ecological restoration Disease prevention Environmental engineering, design, and architecture Ecocity urban design Environmental science education Ecological economics accounting Teleconferencing