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Economics and policyChapter 5
After this lecture, you will be able to:Describe principles of economic theory and summarize their implications for the environmentCompare the concepts of economic growth, economic health, and sustainabilityExplain the approaches of environmental and ecological economicsDescribe the aims of environmental policy and assess its societal contextDiscuss the history of US environmental policy and identify major US lawsCharacterize the institutions involved with international environmental policy and describe how nations handle transboundary issuesOutline the environmental policy process, including the role of scienceContrast approaches to environmental policy
Central Case Study: San Diego and TijuanaRain washes pollutants into Mexico’s Tijuana River
Then onto U.S and Mexican beachesA new sewage treatment facility reached capacity in 3 yearsPoor Mexicans suffer most from contaminated water, disease, and industrial waste
EconomicsPeople say protection threatens economic growth
Environmental protection is actually good for the economyEconomics studies how people use resources to provide goods and services in the face of demandEconomy is a social system that converts resources into:
Goods: manufactured materials that are bought, andServices: work done for others as a form of business
Types of modern economiesSubsistence economy - people get their daily needs directly from nature or their own productionThey do not purchase or trade productsCapitalist market economy -buyers and sellers interact to determine prices and production of goods and servicesCentrally planned economy - the government determines how to allocate resourcesMixed economy - governments intervene in the marketGovernments intervene in a market economy
In mixed market economies, governments intervene to:Eliminate unfair advantages held by single buyers or sellersProvide social services (national defense, medical care, education)Provide safety nets for elderly, disaster victims, etc.Manage the commonsReduce pollution and other threats to health and quality of life
The economy relies on the environmentTraditional economics ignores the environmentEconomies receive inputs (resources)Process themDischarge outputs (waste)
Environmental view of economicsHuman economies are subsets of the environment and depend crucially on it for goods and
services
Environmental systems support economiesEconomic activity uses natural resources (sun’s energy, water, trees, rocks, fossil fuels) as “goods”Ecosystem services: essential services support the life that makes economic activities possible
* Soil formation * Pollination* Water purification * Nutrient cycling* Climate regulation * Waste recycling
Economic activities affect the environmentResource depletion and generating pollution reduces the functioning of ecological systemsDegradation of ecosystem services disrupts economies
Pollution depresses economic opportunitiesEcological degradation hurts poor people the mostRestoring ecosystem services is a prime way to alleviate poverty
15 of 24 global ecosystem services are being degraded or used unsustainably
Adam Smith’s “invisible hand”Adam Smith believed that self-interested behavior could benefit societyIf laws were followed and markets were competitiveClassical economics is when people pursue economic self-interest in a competitive marketplace …The market is guided by an “invisible hand” and …Society benefits This idea is a pillar of free-market thought today
Neoclassical economics includes psychologyNeoclassical economics examines the psychological factors that underlie consumer choicesMarket prices reflect consumer preferenceSupply vs. demandConflict between buyers and sellers leads to ….Production of the “right” quantities of a product
Cost-benefit analysis: evaluating decisionsCost-benefit analysis: costs of a proposed action are compared to benefits that result from the action
If benefits > costs: pursue the actionBut not all costs and benefits can be easily identified, defined, or quantified
It is easy to quantify the cost of pollution-reducing equipment or jobs created by an activityBut hard to assess the effects of pollution on health
Monetary benefits are overrepresentedAnalysis is biased in favor of economic developmentBiased against environmental protection
Neoclassical economics hurts the environmentCapitalist market systems operate according to neoclassical economics
Enormous material wealth has been createdAssumptions of neoclassical economics contribute to environmental degradation:
Resources are infinite or substitutableWe should discount the futureAll costs and benefits are internalAll growth is good
Assumption: resources are infiniteEconomic models treat resources and workers as infinite, substitutable, and interchangeable
Once used up, a replacement resource will be foundSome resources can be replaced but some cannot
Nonrenewable resources (fossil fuels) can be depletedRenewable resources (forests) can also be used up
Assumption: discount long-term effectsA future event has less value than a present oneFuture events are discounted:
Short-term costs and benefits are more important than long-term costs and benefitsPresent conditions are more important than future ones
We ignore the long-term consequences of policy decisionsEnvironmental problems unfold gradually
Discounting causes us to downplay environmental impacts of pollution and resource degradation
Assumption: costs and benefits are internalOnly the buyer and seller experience costs and benefits associated with exchanging goods or services
Pricing ignores social, environmental, or economic costs of pollution and degradationTaxpayers bear the burden of paying these costs
External costs affect people other than buyers or sellersHealth problems, resource depletion, property damage
Ignoring external costs creates a false impression of the consequences of choicesLaws and regulations address external costs
People suffer from external costsPeople who do not participate in a transaction suffer from external costs (health problems,
property and aesthetic damage, stress, lower real estate values)
Assumption: all growth is goodEconomic growth is needed to keep jobs and social order
It creates opportunities for poor to become wealthierProgress is measured by economic growth
But economic growth does not ensure well-beingAffluenza - material goods do not always bring contentment to those who can afford them
Runaway growth can destroy our economic systemResources are ultimately limited
We live in a growth-oriented economyModern global economic growth is unprecedented
Americans are in a frenzy of consumptionEconomic growth comes from:
Increased inputs (labor, natural resources)Economic development: improved efficiency of production (technology, ideas, equipment)
Uncontrolled economic growth is unsustainable Technology can push back limits, but not foreverResources are finite or have limited rates of extraction
Is the growth paradigm good for us?
The dramatic rise in per-person consumption has severe environmental consequences
Ecological economicsEcological economics: civilizations cannot overcome environmental limitations
Uses principles of ecology and systems scienceNatural systems are models for sustainabilityCalls for revolution
Ecological economists advocate steady-state economies:Economies that mirror natural ecological systemsThey don’t grow nor shrink but stay stable
Quality of life increases through technological and behavioral changes
Environmental economicsEnvironmental economics: unsustainable economies have high population growth and inefficient resource use
We can attain sustainability within current economic systemsCalls for reform
Economies grow by modifying neoclassical economics to increase efficiency through technologyEnvironmental economists assign monetary values to ecosystem goods and services
Integrating them into traditional cost-benefit analysis
Valuing ecosystem goods and servicesThe market ignores/undervalues ecosystem servicesNonmarket values (e.g., ecological, cultural, spiritual) are not included in the price of a good or service
Hard to quantify, since there is no traditional measure of economic worth
How do we quantify an ecosystem’s value?Surveys determine how much people are willing to pay to protect or restore a resourceMeasure the money, time, or effort expended to travel to parks for recreationCompare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quietMeasure the cost to restore natural systems, replace systems with technology, or reduce harm from pollution
The global value of ecosystem services The global economic value of 17 ecosystem services equals $46 trillion
More than the GDP of all nations combinedProtecting land gives 100 times more value than converting it to agriculture, logging, or fish farming
Businesses are responding to concernsIndustries, businesses, and corporations make money by “greening” their operationsRecycling, cutting energy use, etc., reduces costs, and increases profitsIn greenwashing, consumers are misled into thinking companies are acting more sustainably than they are
Example: “Pure” bottled water may not be safer or better
Markets can failMarket failure occurs when markets ignore:
The environment’s positive impacts on economies (ecosystem services)The negative effects of activities on the environment or people (external costs)
Government intervention counters market failure through:Laws and regulationsTaxing harmful activitiesDesigning economic incentives to promote fairness, conservation, and sustainability
Environmental policyOnce society agrees that a problem exists, it may persuade its leaders to solve it through policyPolicy is a formal set of general plans and principles to address problems and guide decision makingPublic policy are governmental laws, regulations, orders, incentives, and practices to advance societal welfareEnvironmental policy pertains to human interactions with the environment
Regulates resource use or reduces pollution To promote human welfare and/or protect resources
Policy impacts environmental problemsScience, ethics, and economics help formulate policy
Science provides information and analysisEthics and economics clarify how society can address problems
Policies prevent the tragedy of the commonsCapitalist markets are driven by short-term profit
Not long-term social or environmental stabilityLittle incentive to minimize impactsMarket failure justifies government intervention
Environmental policy tries to protect environmental quality and natural resources while promoting equity or fairness in resource useTragedy of the commons is when commonly held resources will become overused and degraded
Best prevented by restriction of use and management
Environmental policies prevent free riders and external costsFree riders - people are tempted to cheat and not participate in sacrificing to protect the environment
An entity gets a “free ride” by avoiding sacrifices made by othersPrivate voluntary efforts are less effective than public policies, where everyone sacrifices
Environmental policies also promote fairness by eliminating external costsPolicies ensure that parties do not use resources in ways that harm others
Framework of U.S. environmental policyThe U.S. is a good model to understand environmental policy
It has pioneered innovative policies Its policies serve as models for other countriesUnderstanding federal policy helps us understand it at local, state, and international levels
Congress passes legislation (statutory law)It is signed into law by the president
Laws are implemented and executed by agenciesRegulations are specific rules to achieve objectives of broadly written statutory laws
State and local governmental policiesThe structure of the federal government is mirrored at the state levelBut state laws cannot violate principles of the U.S. Constitution
If laws conflict, federal laws take precedenceCalifornia, New York, New Jersey, and Massachusetts have strong environmental laws
Well-funded agenciesCitizens value protecting the environment
Early U.S. environmental policyFrom 1780s to the late 1800s, laws promoted settlement and extraction of resources General Land Ordinances of 1785 and 1787: encouraged people to move west
The federal government managed unsettled landsSurveying and readying them for sale
Settlement increased prosperity for citizensRelieved crowding in eastern citiesDisplaced millions of Native Americans
People believed the land was infinite and inexhaustible
Typical laws from the 1780s to late 1800sHomestead Act (1862): anyone could buy or settle on 160 acres of public land
Typical laws from the 1780s to late 1800sGeneral Mining Act (1872): people could mine on public land for $5/acre with no government oversight
Typical laws from the 1780s to late 1800sTimber Culture Act (1873): encouraged the timber industry to clear-cut ancient trees with little government policy to limit logging or encourage conservation
The second wave of U.S. policyPublic perception and government policy shifted
Laws addressed problems caused by westward expansion and encouraged conservation
Congress created Yellowstone National Park, the world’s first national park, in 1872 Also, national parks, forests, and wildlife refuges
Understood that the nation’s resources were exhaustible They required legal protection
Land management policies addressed soil conservationThe 1964 Wilderness Act preserves pristine land
The third wave of U.S. environmental policyIn the 20th century, people were better off economically
But lived with dirtier air, dirtier water, and more waste and toxic chemicals Events increased awareness of environmental problems and shifted public priorities and policies
Modern U.S. environmental policyOhio’s Cuyahoga River was so polluted that it caught fire in the 1950s and 1960s
The public demanded more environmental protection
The National Environmental Policy Act (1970)NEPA began the modern era of environmental policy
It created the Council on Environmental QualityRequires an Environmental Impact Statement (EIS)
For any federal action that might significantly impact the environmentTo assess the environmental impacts of any federally-funded project
An EIS usually does not halt projectsProvides incentives to decrease damageGrants citizens input into the policy process
The EPA shifts environmental policyIn 1970, President Nixon’s executive order created the Environmental Protection Agency (EPA)
To develop an integrated approach to environmental policyThe EPA:
Conducts and evaluates researchMonitors environmental quality Sets and enforces standards for pollution levelsAssists states in meeting standards and goalsEducates the public
Significant environmental lawsThe public demanded a cleaner environment
Environmental problems needed tough regulationsThousands of laws protect health and environmental quality in the U.S.
Environmental policy changes over timeMajor advances in environmental policy in the 1960s and 1970s occurred because:
Strong evidence of environmental problems existedPeople could visualize policies to deal with problems The political climate was ripe, with a supportive public and leaders who were willing to act
Pictures of Earth from space made us aware that our planet was finite
Many reacted against regulationBy 1990, many felt that regulations were too strict
Imposed economic burdens on people and businessesGeorge W. Bush and the Republican-controlled Congresses (1994–2006) tried to weaken laws“The Death of Environmentalism” (2004): the environmental movement has to be reinvented
It must appeal to core values with an inspiring vision This new outlook helped elect President Obama in 2008
Current environmental policyOther nations have increased attention to issues
The 1992 Earth Summit in Rio de Janeiro, BrazilThe 2002 World Summit on Sustainable Development in Johannesburg, South Africa
This wave of policy focuses on sustainability
Safeguarding ecosystems while raising living standards
International environmental policyInternational law is vital to solving transboundary issuesCustomary law: international law arising from long-standing practices or customs held by most cultures Conventional law: arises from conventions or treaties Montreal Protocol (1987): 160 nations agreed to reduce ozone-depleting chemicals Kyoto Protocol: reduces greenhouse gas emissions causing climate change North American Free Trade Agreement (NAFTA):
Addresses U.S.–Mexico issues
Organizations shape international policyInternational organizations influence nations through:Funding, economic or political pressure, and media attention United Nations (UN): plays an active role in policySponsors conferences, coordinates treaties, publishes researchUNEP (United Nations Environment Programme) promotes sustainabilityResearch, outreach activitiesProvides information to policymakers and scientists
The World Bank and European UnionThe World Bank is one of the largest funding sources for economic development in poor countriesDams, irrigation, infrastructure, etc.Funds unsustainable, environmentally damaging projectsThe European Union (EU) seeks to promote Europe’s unity and its economic and social progress
Can sign binding treaties and enact regulationsSees environmental regulations as barriers to trade
The World Trade Organization (WTO)Represents multinational corporations
Promotes free tradeCan impose penalties on nations that don’t comply with its directivesInterprets environmental laws as unfair barriers to trade
Brazil and Venezuela filed a complaint against U.S. regulations requiring cleaner-burning fuelThe WTO agreed with Brazil and Venezuela, despite threats to human health
Critics charge the WTO aggravates environmental problems
International treaties can weaken protectionInternational treaties allow industries and corporations to weaken environmental protection laws
They see laws as barriers to tradeUnder NAFTA, investors can sue a country for lost profits
Canada sued the U.S. for $300 million for banning beef after finding mad cow disease in Canada cowsCanada sued the U.S. for $1 billion for banning MTBE, a dangerous gasoline additive The U.S. forced Mexico to pay $16 million and reopen a toxic waste dump
NGOsNongovernmental organizations (NGOs) are entities that influence international policySome do not get politically involved
Example: The Nature ConservancyOthers try to shape policy through research, education, lobbying, or protest
Example: Conservation International, the World Wide Fund for Nature, Greenpeace, Population Connection
Step 1: Identify a problemRequires scientific inquiry and data collection
Step 2: Pinpoint causes of the problem
Step 3: Envision a solutionScience plays a vital role here, tooSolutions also require social or political action
Step 4: Get organizedOrganizations are more effective than individuals
But a motivated, informed individual can also succeed
Step 5: Cultivate access and influence
Step 6: Shepherd the solution into lawPrepare a bill, or draft law, containing solutionsFind members of the House and Senate to introduce the bill and shepherd it through committeesThe bill may become law or die in various ways
How a bill becomes lawBefore a bill becomes law, it must clear multiple hurdles
Step 7: Implement, assess, and interpret policyFollowing a law’s enactment
Administrative agencies implement regulationsPolicymakers evaluate the policy’s successes or failuresThe courts interpret the law
Seven steps to making environmental policyTheoretically, in the U.S., everyone has a voice and can make a differenceBut money wields influenceSome people and organizations are more influential than othersCreating environmental policy has several stepsRequires initiative, dedication, and the support of many people
Science plays a role, but can be politicizedA nation’s strength depends on proper use of science
Governments use some tax money to fund researchSometimes policymakers let ideology determine policy
Politicians ignore scientists and mislead the publicGovernment scientists have had their work censored, suppressed, or edited and their jobs threatenedUnqualified people are put into powerful positionsWhen taxpayer-funded research is suppressed or distorted for political ends, everyone loses
Scientifically literate citizens must ensure that our government uses proper use of science
Three major types of policy approachesStrategy: lawsuits in the courtsBefore legislation, lawsuits addressed U.S. policy issues
Individuals suffering from pollution sued polluters in courtCourts make polluters stop or pay fines
Industrialization and population growth made it harder to control pollutionAlso, justices were reluctant to hinder industry
People saw legislation and regulation as more effective in protecting health and safety
Strategy: command and controlCommand-and-control approach: a regulating agency prohibits actions, or sets rules or limits
Threatening punishment for violatorsThis is the approach used for most environmental laws and regulations enforced by agencies todayThis simple approach has worked well
It brings cleaner air, water, safer workplaces, and healthier neighborhoods
Strategy: economic policy toolsPeople don’t like the top-down approaches that dictate particular solutions to problemsAlternative approaches channel innovation and economic policies to benefit the public:
Promote desired, and discourage undesired, outcomesEncourage market competition to produce new solutions at lower cost
Strategies include: Green taxes, subsidies, permit trading, and ecolabeling
Green taxes discourage unsustainabilityGovernments use taxes to benefit the public
Internalizing harmful external costs makes them part of the cost of doing businessGreen taxes: tax environmentally harmful activities and products
Businesses reimburse the public for damage they causeThe more pollution, the higher the tax payment
Companies have financial incentives to reduce pollution with freedom to decide how to do so
But costs are passed on to consumers
Who should pay for pollution?Green taxes are not widely supported in the U.S.
Other “sin taxes” (e.g., on cigarettes and alcohol) are tools of U.S. social policyPolluter-pays principle: the party that pollutes is held responsible for covering the costs of its impacts
Widely used in EuropeCarbon taxes are controversial taxes on gasoline, coal-based electricity, and other fossil fuels
Used to fight climate change
Subsidies promote certain activitiesSubsidy is a government giveaway of cash or resources to encourage a particular industry or activity
A tax break helps an entity by relieving its tax burdenSubsidies can promote sustainability, but they have been used to support unsustainable activitiesThe U.S. subsidizes logging, grazing, and mining Benefits private parties while degrading publically held resourcesNations give $1.45 trillion per year in harmful subsidies
U.S. fossil fuel companies received $72 billion taxpayer money (2002–2008)—renewable energy received $29 billion
Permit trading saves moneyIn permit trading, a government-created market in permits for an environmentally harmful activity
Businesses buy, sell, or trade these permitsCap-and-trade emissions trading system: the government sets pollution levels (“caps”)
Permits let polluters emit some amount of pollutionPolluters can exchange (sell) permitsThe government can set lower emission levelsCompanies have an economic incentive to reduce emissions
A cap-and-trade system for air pollutionOne U.S. cap-and-trade system decreased sulfur dioxide emissionsCuts were obtained more cheaply than expected
With no effects on electricity supply or economic growth
Billions of dollars per year are saved
Benefits outweigh costs 40 to 1
Ecolabeling empowers consumersUses the marketplace to counteract market failuresEcolabeling tells consumers which brands use environmentally benign processes
Dolphin-safe tuna, labeling recycled paper, etc.
Market incentives work at the local levelMunicipalities charge residents for waste disposal according to the amount of waste generatedCities tax disposal of costly items (tires, motor oil)Some cities give rebates for buying water-efficient appliancesPower utilities give discounts to those buying efficient lightbulbs and appliances
It is cheaper than expanding generating capacity
ConclusionEnvironmental policy is a problem-solving tool
It uses science, ethics, and economicsConventional command-and-control approach uses legislation and regulations to make policy
It is the most common approachInnovative economic policy tools are being developed
Environmental and ecological economists quantify the value of ecosystem servicesEconomic well-being does not need a trade-off with environmental quality
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