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Nature, Scope and Key
Concepts in Environmental
Economics
Learning Outcomes
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After this topic you should be able to
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Discuss the key environmental issues in today’s world
Understand the economic impact of environment
issues
show how the economy and the environment are
related to each other at the most basic level
Understand the inherent trade-offs between
production and environmental quality between
present and future generations
State the fundamental balance phenomenon and
from this understand how best to reduce residual
flows from production and consumption activities
Identify the key environment issues and drivers of
environmental change
The Problem
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There has been an unprecedented global
economic growth especially since the 1920s
Growth has been unevenly distributed &
incurred significant cost to the environment
World population has increased from 3bn in
1970 to 7bn today
Its expected to reach 9bn by 2050
Serious economic, social and environmental
consequences as a result
Environment and Economic
Growth
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Environment problems will be the
biggest challenge to economic growth
by 2030 (OECD, 2012) (Stern, 2006,
2008)
The key environment issues
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Climate Change
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Biodiversity
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Access to fresh drinking water
Air Quality
Environmental Disasters and
Economic Growth
Environment disasters cost 8.6% in
annual GDP growth in 2013
 Future GDP costs of climate change
are unknowable. Stern Report, 2006,
estimated this at 20 per cent of GDP
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 We underestimated the risks……we underestimated the
damage associated with termperature increases….and
we underestimated the probabilities of temperature
increases” (Nicolas Stern, 2008)
Drivers of Environmental
Change
1.
2.
3.
Demographic Developments
Urbanisation
Economic Growth
Population and demographic
developments
Population growth is a key driver of
local and global environmental
change
 Due to
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Increased consumption of natural
resources and land use
 Changes in wealth and age structure
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Urbanisation
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Worlds population is becoming increasingly
urbanised. In 1970 36% of world population lived in
urban areas. By 2009 that share had reached 50%
Urbanisation has positive and negative
environmental consequences.
On the positive side urbanisation can lead to the
concentration of activities and allow for economies
of scale and easier access (ie water & energy)
On the negative side, a greater concentration of
population can cause higher levels of air pollutions
Economic Growth
Economic Growth and rising per
capita income, if based on the
increased use of natural resources
exacerbate environmental pressures
 However other sources of growth,
such as technological progress or
improvement in education and human
skills can decouple environmental
pressures from economic growth
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Links between economic activity
and environmental pressures
Energy use is driven by economic
activity and technological
developments
 As GDP is projected to quadruple so
will energy use – around 80%
increase over global energy
consumption in 2010
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Scope of the module
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Given the urgent need to address key
environmental issues it is important to
explore the different policy options
available to tackle the problem
The first eight topics will address the
effectiveness of a variety of policies
employed in reducing environmental
issues
The last four topics will be dedicated to
examining specific issues including peak
oil, overfishing, deforestation and climate
change
Defining Environmental
Economics
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Environmental economics is the application
of the principles of economics to the study
of how environmental resources are
managed
It focuses primarily on how and why people
make decisions that have consequences for
the natural environment
Also concerned with how economic
institutions and policies can be changed to
consider environmental quality
The Economy and the
Environment
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Two economic functions
pursued by society are
production and
consumption
Natural world is the
provider of raw materials
and energy inputs
The study of nature in its
role as provider of raw
materials is called natural
resource economics (a)
The impact of economic
activity on the quality of
the natural environment
is called environmental
economics (b)
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Fig 1: The economy
and the environment
Nature
a
Economy
b
The Environment: An
Economic and Social Asset
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Inputs of natural resources are important in economic
production
Environment quality can be thought of as a productive
asset for a society
In other words, there is a trade off between
conventional economic output and environmental
quality
Fig 2 shows a PPF which is a curve showing the
different combinations of two things a society can
produce at any given time, given its resources and
technological capabilities
The PPF: Trade-off between
environmental quality and market goods
Market
goods
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Fig 2 (a) PPF today
C2
Market
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goods
Fig 2 (b): PPF in 60 years
C4
C3
C1
e2
e1
Environmental
Quality
e4 e3
Environmental
Quality
The PPF
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The PPF shows the different combinations of market output and
environmental quality that are available to a group of people who
have a fixed endowment of resources and technology
In fig 2 (a) If the current level of economic output is C1, and
increase to C2 can be obtained only at the cost of a decrease in
environmental quality
Where society chooses to locate itself on the PPF is a matter of
social choice
In fig 2 (b) shows that degrading the environment too much
today will affect future possibilities and PPF will shift inwards.
Future generations can have the same level of output as
present generation but only at a lower level of environmental
quality
The Fundamental Balance
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The Fundamental Balance Phenomenon says that in the
long run all materials taken out of the natural system by
human beings must eventually end up back in the
system.
M = R dp + R dc
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Where M = Raw materials extracted
Rdp = discharged producer residuals
Rdc= discharged consumer residuals
Economy is divided into two broad segments (producers
and consumers)
Production and consumption create ‘residuals’ which may
be emitted into the air or water or land
The implication is that to reduce the mass of residuals
disposed into the environments, it is necessary to
reduce the level of raw materials into the system
The Fundamental Balance 2
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Rdp + Rdc=M=G + Rp-Rrp –Rrc
This says that the quantity of raw materials (M) is
equal to the output of goods and services (G) plus
production residuals (Rp) minus the amounts that are
recycled from producers (Rrp) and consumers (Rrc)
There are therefore three ways of reducing M
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Reduce G
Reduce RP
Increase Rrp Rrc
Summary
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There is global agreement that climate
change, loss of biodiversity, access to fresh
water and air pollution are serious issues
that need to be addressed through
international policy action
Global coordination effort is required to find
the most effective solutions
The type of policy action matters
(awareness campaigns, regulation, punitive
legislation, carbon taxes, green technology)
Summary
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The topic explored some basic linkages
between the economy and the environment
Discussed the trade-offs between
conventional economic goods and
environmental quality between current and
future generations using the PPF
Introduced the fundamental balance
phenomenon and how we might reduce
residuals from production and consumption
Required Reading
OECD (2012) Environmental Outlook,
OECD Publishing, USA, MA.
Executive Summary and chapter 2
(available on sulis)
 Field, B and M. Field (2013).
Environmental Economics: An
Introduction (6th ed) McGraw Hill,
Chapter 1 and Chapter 2
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