Economics and The Environment John Perez-Garcia Forest Economist

The Sustainability Paradigm zMeeting essential needs (jobs, food, energy, water and sanitation). zConserving and enhancing the resource base. zReorienting technology. zMerging environmental concerns and economics in decision making. 2

Presentation Summary zKey Economics Issues zWhat is Economics zDemand and Supply zEconomic Specifics and the Environment zDecision Making and Cost Benefit Analysis zSummary of Key Issues 3

Key Economic Issues zWhat is the correct level of environmental protection? zHow should this be decided? zHow should this level be achieved? zWho should bear the cost? Requires an interdisciplinary approach yEconomics, Ecology and Ethics 4

What is Economics? zAllocation of scarce resources zIf there is no scarcity, there is no problem zScarcity rent zExternalities zWillingness to Pay 5

Firms Households Output Input The Economy Economics and The Environment 6

Firms Households Output Input The Economy The Environment 7

Resource Economics Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials 8

Environmental Economics Firms Households Output Input The Economy The Environment Pollution Wastes 9

Economics and The Environment: Strategies Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials Pollution Wastes Conservation Recycle Substitutes 10

Economics and The Environment: Strategies Firms Households Output Input The Economy The Environment Energy Air Water Amenities Raw Materials Pollution Wastes Conservation Recycle Substitutes Remediate Restore Remove 11

Environmental Economics zApplying economic theory to environmental goods and services. zIncludes the supply of environmental “bads” (Pollution and wastes). zIncludes the demand for environmental goods and services that avoid damages from “bad” output. 12

Individual Demand = Benefits Price Quantity 13

Individual Demand Price $ per unit Quantity $5 6 $8 Total Willingness to Pay 14

Supply = Cost Price Quantity 15

Supply Price Quantity Total Cost 16

Market Equilibrium = Efficiency Price Quantity 17

Market Equilibrium = Efficiency Price Quantity Total Net Benefits 18

Market-based Solutions zUsing economic principles to achieve efficient levels of environmental protection yDefining property rights yInternalizing environmental costs of production yCreating scarcity 19

Economics and The Environment zMarket failures and externalities yCost of production are external to the price of the product yLack of well-defined property rights yInternalizing environmental values 20

Economics and The Environment zMarket failures and externalities yCost of production are external to the price of the product yLack of well-defined property rights yInternalizing environmental values 21

Economics and The Environment zMarket failures and externalities yCost of production are external to the price of the product yLack of well-defined property rights yInternalizing environmental values 22

Economics and The Environment zMarket failures and externalities yCost of production are external to the price of the product yLack of well-defined property rights yInternalizing environmental values 23

Decision Making zCost benefit analysis yProject definition yClassification of impacts yConversion into monetary terms yDiscounting yProject assessment ySensitivity analysis 24

A Cost Benefit Analysis of Forests and Fish Rules: A Case Study 25

Existing Buffers A sampled section with a single ownership and stream data. 26

Proposed Buffers A sampled section with a single ownership and stream data. 27

Net Buffers A sampled section with a single ownership and stream data. 28

Potential Costs: CBA 29

Cost Estimate zTimber asset, road planning and lost wage costs range from 7.15 to 8.18 billion dollars zNo estimates on costs associated with other rules, pesticide restrictions, equipment zone limitation, social and economic dislocation, and other factors 30

Benefit Estimation zMuch less straight- forward zNo clear relationship between fish values and forests zNon-market techniques 31

Potential Benefits: CBA 32

Valuation Methods zConstructed market techniques yContingent valuation methods yChoice experiments 33

LBP Study: High Status Quo 34

LBP Study: Low Status Quo 35

Summary Table for Benefit Cost Analysis (Billion dollars) 36

Comments We are lacking key data on the production function between riparian habitat and fish populations. 37

CBA Limitations z There are no data that directly links the environmental effects from new proposed rules effects with a change in fish populations. z Programs in other sectors can potentially have a higher impact on the fishery resource than the new forest practices rules, hence higher net benefits. These other programs may also have lower impacts, hence lower net benefits. 38

The Key Issues zWhat is the correct level of environmental protection? 39

The Key Issues zHow should this be decided? yA combination of market-based approaches and regulations 40

The Key Issues zHow should this level be achieved? yUsing cost effective approaches 41

The Key Issues zWho should bear the cost? yThose willing to pay for it. 42

The Key Issues Requires an interdisciplinary approach yEconomics, Ecology and Ethics 43