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