1. Topics Today Introduction to environmental and natural resource economics  Economists’ perspective on the environment  Linkages between the economy, the environment, and natural resources  The economic approach to decision making 1

2. Economists’ view of the environment For economists, the environment is an asset. As an asset, the environment provides:  Life-sustaining services (water and clean air),  Aesthetic services, (scenery, recreation),  Raw materials (wood, minerals, agricultural produce),  Energy (coal, oil, natural gas, nuclear, hydro), and  A waste sink (assimilative capacity). We can think of the environment as the stock of natural capital. 2

3. Environment as an asset Generating environmental services over time means that we must be concerned about preserving the stock of natural capital. Other important assets:  Produced capital (machinery, tools, buildings),  Human capital (skills, experience, education) If natural capital is insufficient, our standard of living will decline 3

4. Environment and economic linkages Water and Clean Air 4

5. Materials flow First law of thermodynamics – energy and matter cannot be created or destroyed. Flow of materials from environment into economic system must either accumulate or return to the environment. When accumulation stops, mass in equals mass out. This means that when waste accumulation reaches maximum, further wastes must flow back into the environment. 5

6. Materials flow Production of goods and services Energy and raw materials Goods consumed (used up) Additions to inventory Waste products Absorptive capacity of the environment 6

7. Materials flow Actions to reduce waste flows:  Increase efficiency in the production of raw materials and energy,  Use fewer raw materials and less energy in the production of goods and services (efficiency, recycling),  Consume fewer goods. 7

8. Materials flow Excessive wastes can depreciate natural capital. When wastes>absorptive capacity, services from natural capital decline. Environmental economics has do to with how much environmental damage can be sustained without depleting our natural capital. 8

9. The economic approach Positive economics – describes what is, or what will be  If the price of oil rises, what will happen to the demand for hybrid vehicles?  If the recession continues, what will happen to the demand for oil? Normative economics – deals with what ought to be  How should we control greenhouse gases?  How much forest should we preserve? 9

10. Evaluating options using normative decision making All potential actions have both costs and benefits  What is the cost to you to attend class?  What are the potential benefits? Benefit/cost framework – if the benefits of an action exceed the costs, then the action is desirable 10

11. Evaluating options using normative decision making B=benefits C=costs Rule: if B>C (or if B/C>1) then the action should be done. Otherwise, oppose the action. Caveats:  Measuring benefits and costs is very difficult  Other criteria are important (fairness, distribution) 11

12. Summary so far The environment is an important asset (natural capital) Squandering our natural capital will cause our standard of living to decline The economy and the environment are strongly linked (what goes in must come out) Actions should be evaluated by considering the benefits and the costs (normative framework) 12

13. Case Study: Global Warming Greenhouse gas accumulation is raising the earth’s surface temperature Greenhouse gases are generated by the release of CO 2, NOx, methane, and CFCs into the atmosphere Range of temperature increase: 2.5 o – 10.5 o by 2100 Context: in the last ice age, surface temperature was 9 o cooler than today 13

14. Case Study: Global Warming Consequences of global warming:  Agricultural output Cold areas will get warmer, shifting production north Hot areas will get hotter, causing increase in arid lands  Natural ecosystems Natural systems cannot adapt this quickly Forest losses, species extinction, natural pests will flourish  Sea level rise Warming of 4 o or more raises probability of melting polar ice sheets Causes sea levels to rise globally, threatening coastal life 14

15. Economic framework How much greenhouse gas is too much? Using the efficiency standard: can we assess the benefits and costs of cutting greenhouse emissions? Great uncertainties and irreversibilities exist Weight of opinion calls for some reduction compared with business-as-usual 15

16. Economic framework Is there a role for government? The market system will produce too much greenhouse gas Policy options:  Command and control regulation – mandate specific pollution control technology  Clean technology policies – use regulation to require more efficiency; spending more on mass transit over highways  Incentive-based regulation – use market incentives to reduce CO 2 emissions 16