Macroeconomics, International Economics, & Green Accounting How can macroeconomic & int’l policy affect the environment?

The income effect Recall theory: Income is an argument of demand If consumption of a good: Increases with increased Y, normal good Decreases with increased Y, inferior good Recall Environmental Kuznet’s curve Pollution is first (+) correlated with income, then (-) correlated.

Individual to societal demand How translate individual demands into societal demand and government policy? Aggregate individual demands, translate into government demand Think of environmental quality as a public good Level of provision depends on form of government. Democracy more likely to provide public goods? What is “supply of environmental quality”? What is “demand for environmental quality”?

Demand and supply for environmental quality Demand: value to consumers How consumers value (are willing to pay for) things like clean air, clean water, biodiversity, ecosystem services, (non)-use values. Supply: cost to provide Richer economies have larger industrial base, increasing MC of providing environmental quality (not necessarily)

Interaction of supply and demand Both supply and demand may shift when incomes in a country increase. D0D0 D1D1 S0S0 S1S1 Environmental Quality Q0Q0 Q1Q1 $ Drawn this way, environmental quality increases with increased Y.

But environmental quality may  D0D0 D1D1 S0S0 S1S1 Environmental Quality Q0Q0 Q1Q1 $ Drawn this way, environmental quality decreases with  Y.

Safe water vs. income % w/o safe water Income Regression analysis on 86 Countries from around the world Shows improvement in drinking Water quality with  Y.

Why are we studying this? How to improve environmental quality in poor countries? Could focus international effort on protecting resources, improving environment directly If we believe Kuznet’s curve, could focus attention on increasing incomes of poor people, who will then demand increased environmental quality. Insufficient data to be certain about outcome.

Transboundary pollution Pollution that migrates beyond jurisdiction of source. GHGs, SO2 (acid rain), water pollution, some biodiversity loss, exotic species. Possible policy instruments Tariffs, standards for cleanliness, international environmental agreements, non-targeted international agreements.

Green national accounting Measures of national income: GNP, GDP Don’t account for environmental degradation and resource depletion Can give misleading measure of national “well-being”, may lead to wrong policy. Many adjustments have been proposed to “correct” standard measures.

“Natural capital” depreciation Natural capital: the available endowment of land and natural resources Measure depletion of natural resources (oil, timber, minerals, soils) Subtract from standard measures Result: many developing nations show substantial effect

Indonesia example: “Adjusted Net Domestic Product”

Pollution control & cleanup How should pollution control and cleanup costs be accounted for in developed nations? Should cleanup expenditures contribute to GNP? Some think not. Main issue: don’t double count. These are legitimate expenditures in order to maintain environmental values.

How are national accounts used? Primary use: assist policy makers in government. E.g. Gov’t expenditures on scientific research are linked to current economic performance and climate. United Nations has proposed a “System of Environmental and Economic Accounting”, some adjustments underway.

Paying for public goods Public goods will be under-provided, externalities will not be internalized in free market. Government intervention: tax revenues can pay for cleanup, regulation, public goods provision But many taxes “distortionary” E.g. Income tax discourages work! Costs $1.40 to raise $1 in revenue

Double dividend If we substitute distortionary taxes with pollution taxes, we may earn a “double dividend” Reduce pollution (and therefore damage from pollution) Reduce distortionary taxes on labor and thus the DWL from those taxes This is called the “revenue recycling effect”

A 3 rd effect of pollution taxes “Tax interaction effect” Polluting good and leisure are substitutes Tax pollution, demand for leisure shifts out If labor is still taxed, shift introduces an additional DWL attributed to  pollution Decreases social welfare. Overall size of tax interaction effect varies among polluting industries Estimate: pollution tax should be set at 63% of marginal damage.