Environmental Economics M Rafiq IM Sciences

What is Environmental Economics? Environmental economics is the study of  how the economy affects the environment,  how the environment affects the economy,  and the appropriate way to regulate economic activity so as to achieve an optimal balance between competing environmental and economic goals.

The economy affects the environment U.S. carbon emissions are forecast to drop by 5% due to the recession  In many cases, wealthy countries have lower pollution emissions (despite their greater GDP), as wealthy countries can afford expensive pollution control technologies.

The environment affects the economy : Warming from climate change affects the skiing industry.  Sulphur dioxide and particulate emissions can increase asthma, increasing sick days, which reduces GDP

The appropriate way to regulate:  The Waxman-Martin climate change bill proposed regulating greenhouse gas emissions in part with a cap-and-trade with a safety valve.  The house bill has other provisions. It imposes a technology standard: new buildings must meet certain energy efficiency requirements.  An effective ban on incandescent light bulbs goes into effect at the end of the year

Achieving an “optimal balance:” Nylon production produces nitrous oxide, a greenhouse gas which is much more warming than carbon dioxide. To eliminate emissions costs about $10-20 million per factory for scrubbers, plus catalysts that cost $1 million per year. Is the benefit of reduced nitrous oxide emissions worth the cost In Baltimore, reducing total suspended particulates (TSP) in the air from 115 micrograms per cubic meter to 87 micrograms costs approximately $15 million. Is the benefit worth the cost

Topics Within the above general ideas are many topics to study;  Can the market economy achieve an optimal balance between nitrous oxide scrubbers and other things we might care to produce? If not why?  How do we determine what the optimal balance is?  What is the least cost way to regulate pollution emissions?  How do we regulate pollution that originates in one country and lands in another? How much do households value a good environment

Approach A.Positive versus Normative B. Moral neutrality. Environment is not morally imperative ……. No need for the subject  Rather we say what should be produced more??  Environment friendly or other goods  Related is how we treat households and firms incentives or command and control

Resource and ecological economics  Natural resource economics deals with the production and use of non-renewable resources such as oil, and renewable resources such as forests.  Environmental economics is concerned with market failures causing excessive pollution or insufficient protection of the natural world.  This distinction is a fine one, and in some cases overlap exists.  Rather than discuss pollution, an environmental topic, one could discuss clean air, which is a renewable resource.  The production of wood from forests sometimes results from insufficient protection of the natural world. But we will not be talking about oil extraction in this class.

Differences  Environmental economics is a static view  Resource economics is dynamic  Ecological economics on the other hand consider;  ecosystem & ecosystem in broader sense…long term health of the ecosystem  ‘Energy theory of value’

Other important issues  Important contribution of EE to ECO. is demand for non market goods  Revealed preference Vs. Sated Preferences  Important area of discussion the measurement and estimation methods  Regulation… asymmetric information, technological changes, institutions, empirical properties of regulatory framework, theoretical issues of regulatory design  Free trade….exploitation, environmental regulation barriers to trade???

Global Environmental Problems & Policy Solutions  The idea is to get a glimpse of environmental problems across the globe, their magnitude and changes over time  Policy solutions/regulations  Quick survey  Focus is on four main categories  Air Pollution, Water Pollution, Toxic emission, Ecosystem Health

Air Pollution  Particulate matter are the large (less than 10 µg, denoted PM 10 ) and small (less than  2.5 µg, denoted PM 2.5 ) soot and smoke particles. These damaging particles are linked to heart and lung disease. A principle source is diesel emissions.  Sulphur dioxide (SO 2 ) causes acid rain and is linked to asthma and bronchitis. A primary source is the burning of coal for electricity

Air pollution  Carbon monoxide (CO) is a poisonous gas produced through fuel combustion.  Nitrous oxide (NO) and nitrogen dioxide (NO 2 ), collectively (NO x ) are greenhouse gasses that also contribute to ground level ozone (smog) problems. Road traffic and many industrial processes contribute to NO x emissions.  Hydrocarbons and volatile organic compounds (VOCs) are emitted via fuel combustion and from evaporation of solvents. Some are carcinogens and others lead to smog.

Air Pollution indicators for selected cities China GDP per capita (US$) SO2 concentration (Beijing) PM concentration (Beijing) CO2 emissions per capita (tonnes) Iran GDP per capita (US$) SO2 concentration (Tehran) PM concentration (Tehran) CO2 emissions per capita (tonnes) Japan GDP per capita (US$) SO2 concentration (Tokyo) PM concentration (Tokyo) 61 NA 49 CO2 emissions per capita (tonnes)

Environmental Kuznets Curve(EKC) Hypotheses  Air pollution Levels first rises and then declines with income  The results for many pollutants may not support the results  Carbon dioxide emissions increases with GDP  Countries suffer very little because of their own emissions  Incentive not to undertake costly emission reductions

The Case of Pakistan  The ongoing development in the third world countries has led to understanding the repercussions of environmental hazards that are prevailing in such countries.  Similar is the case with Pakistan, which with the help of a number of international organizations has started addressing the aforementioned issue.  On the basis of this review it is possible to assess the status and to determine the trends in air pollution sources, emissions, concentrations, and exposures in four metropolitan cities (Karachi, Lahore, Rawalpindi, and Peshawar) of Pakistan.  Environmental pollution in these cities is analyzed in terms of  Particulate Matter (PM) and derived particle mass concentrations.  Heavy metal concentrations.

Metropolitan cities of Pakistan PM Karachi193μg m- 3 Lahore200 μg m-3 Peshawar219 μg m-3 Rawalpindi185 μg m-3 The particulate matter concentration is major cities of Pakistan such as number of respiratory and nervous diseases. The origins of this high concentration pm can vary from anthropogenic to natural. Natural sources include sea salt particles and dust of minerals while anthropogenic sources include road dust, construction, burning of biomass and emissions from industries and vehicles.

PM2.5/PM10 ratio  In mentioned cities, the pm 2.5/pm10 ratio was 0.4 in Karachi, 0.45 in Lahore, 0.31 in Rawalpindi and 0.30 in Peshawar.  The astronomic ratios as opposed to the standards set by WHO leaves a lot to be desired in terms of environmental conditions improvement.  The metropolitan cities have been plagued by environmental hazards due to vehicular emissions, industrial emissions, construction and dust from roads.  The industrial area in these cities has been close to the townships which has caused the direct diffusion of hazardous chemicals into the atmosphere in which people breath.

Heavy Metal Concentration

Government Regulations  The government has been taking drastic steps for the relocation of industrial areas to places which would have minimal effect on the quality of life. similarly, the environmental authorities have been striving to implement stringent regulations regarding vehicular emissions and the construction of roads, which would go a long way towards improving environmental condition of metropolitan cities in Pakistan.  The government of Pakistan has initiated a clean air Programmes and has also set up monitoring stations for air quality.  Although the desired standards in terms of air quality have not been established as yet, the government is heading in the right direction towards achieving the standards set by WHO.  The government is also allowing a number of international organizations for conducting scientific studies, which would help the authorities understand the measures that need to be taken for the improvement of air quality.

Water pollution  Organic material deposited in water ways and lakes  Requires Oxygen decomposition  Measure of water Pollution is Biological Oxygen Demand (BOD)  Water body becomes depleted of oxygen, can not support life  Further depletion leads to anaerobic Bacteria  Major type of organic waste is Human Waste

Water Pollution 1991 country GDP per capita %pop (safe drinking water) %POP sanitation Child mortality rate Burkina Faso India Ghana China Brazil Costa Rica Mexico Greece UK Denmark

Continue……  Difficult water pollution is ground water pollution  Leaking of surface storage facilities, either waste or liquid storage; for example, Gasoline  Chemical waste dumped  Leaching of pesticides and Fertilizers into the groundwater  Surface waters, such as lakes & Rivers are ultimate repositories of what is deposited on land  Sulfur & Nitrogen Oxydes emission are deposited on Land in dry or acidic precipitation  Lakes and Rivers suffer due to Nutrients from Agriculture runoff and acidification

Toxic Chemicals  Rachel Carson’s Silent Spring, a book about the pesticides linkage with our food chain  Causing havoc with wild birds  Lead in gasoline  Lead causes mental retardation  Besides, old toxic sites and accidental discharge

Ecosystem and Environments  Loss of habitats due to expanding human population  Forest clearing for agriculture  Wetland decorations; agriculture and housing  Endangered species are ever growing

US Environmental Compliance Spending  Estimating such costs are fraught with uncertainty, nonetheless,  it is clear that compliance costs are modest in a $13 trillion dollar economy.  The US spends about one half of one percent of income on compliance with air pollution regulations.  The total compliance share for all types of pollution regulation is under 2% of GNP.  It all started in 1970’s.

Abatement spending in other developed countries is similar to the US Year US France West Germany Netherlands UK

Environmental Regulation A Command and Control Regulations  The regulator specifies what steps the polluter must take to reduce pollution, and usually how much pollution must be reduced.  Command and control is by far the most common form of regulation.  Command and Control regulations typically specify a TECHNOLOGY STANDARD, where the regular species the environmental performance of a particular production technology.  Command and control regulations may go even further and specify in great detail exactly how a good is to produced.

Examples:  CAFE standards: minimum average fuel economy for all cars sold by a given company in a year (currently 27.5 MPG for cars and 23.5 MPG for trucks).  Low flush toilets: maximum water use per flush (1.5 gal/flush  Coral Gables lawn watering limits (Wednesday and Saturday on the odd side of the street, and only early in the morning).  Surface coatings (e.g. furniture manufacture): limits on the types of furniture coatings, requirements to use a certain type of vent to recapture vapors emitted during painting

Examples:  Renewable energy standard: house climate change bill requires 20% of each utility company’s power to come from renewable sources by  Household appliance standards: the house climate change bill has standards for fluorescent lamps, base lamps, candelabra base lamps,  dishwashers, portable spas, faucets, televisions, buildings, and many other products. The article discusses the energy standard for light bulbs which e ff ectively bans incandescent bulbs.

Regulations….. B Market based instruments A MARKET BASED REGULATION provides economic incentives to reduce pollution.  Market based instruments come in 3 flavors: 1. Taxes. Charge a tax per unit of pollution emitted. 2. Tradable permits (cap and trade). Limit pollution, but allow the right to pollute to be traded 3. Liability. Allow pollution victims to pursue compensation from polluters through the legal system

Examples 1. Gasoline taxes (gas tax), gas guzzler car taxes, “by the bag” garbage disposal fees. 2. Cap and trade sulfur dioxide program, NOx cap and trade in the Northeastern states, proposed cap and trade program in the Waxman-Martin climate change bill. 3. Various lawsuits associated with toxic chemical leaks.

comparison The key di ff erence between command and control and market instruments is that market based instruments do not proscribe any particular method of reducing pollution. Consider the gas tax versus CAFE standards CAFE standards may create incentives for households to buy less fuel e ffi cient used cars. Thus, we cannot even say for sure that fuel use declines with the CAFE standard.