Download Economics and Policy

Economics and policy
Chapter 5
After this lecture, you will be able to:
Describe principles of economic theory and summarize their implications for the
environment
Compare the concepts of economic growth, economic health, and sustainability
Explain the approaches of environmental and ecological economics
Describe the aims of environmental policy and assess its societal context
Discuss the history of US environmental policy and identify major US laws
Characterize the institutions involved with international environmental policy and describe
how nations handle transboundary issues
Outline the environmental policy process, including the role of science
Contrast approaches to environmental policy
Central Case Study: San Diego and Tijuana
Rain washes pollutants into Mexico’s Tijuana River
Then onto U.S and Mexican beaches
A new sewage treatment facility reached capacity in 3 years
Poor Mexicans suffer most from contaminated water, disease, and industrial waste
Economics
People say protection threatens economic growth
Environmental protection is actually good for the economy
Economics studies how people use resources to provide goods and services in the face of
demand
Economy is a social system that converts resources into:
Goods: manufactured materials that are bought, and
Services: work done for others as a form of business
Types of modern economies
Subsistence economy - people get their daily needs directly from nature or their own
production
They do not purchase or trade products
Capitalist market economy -buyers and sellers interact to determine prices and production
of goods and services
Centrally planned economy - the government determines how to allocate resources
Mixed economy - governments intervene in the market
Governments intervene in a market economy
In mixed market economies, governments intervene to:
Eliminate unfair advantages held by single buyers or sellers
Provide social services (national defense, medical care, education)
Provide safety nets for elderly, disaster victims, etc.
Manage the commons
Reduce pollution and other threats to health and quality of life
The economy relies on the environment
Traditional economics ignores the environment
Economies receive inputs (resources)
Process them
Discharge outputs (waste)
Environmental view of economics
Human economies are subsets of the environment and depend crucially on it for goods and
services
Environmental systems support economies
Economic 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 environment
Resource depletion and generating pollution reduces the functioning of ecological systems
Degradation of ecosystem services disrupts economies
Pollution depresses economic opportunities
Ecological degradation hurts poor people the most
Restoring 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 society
If laws were followed and markets were competitive
Classical 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 psychology
Neoclassical economics examines the psychological factors that underlie consumer choices
Market prices reflect consumer preference
Supply vs. demand
Conflict between buyers
and sellers leads to ….
Production of the
“right” quantities
of a product
Cost-benefit analysis: evaluating decisions
Cost-benefit analysis: costs of a proposed action are compared to benefits that result from
the action
If benefits > costs: pursue the action
But 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
activity
But hard to assess the effects of pollution on health
Monetary benefits are overrepresented
Analysis is biased in favor of economic development
Biased against environmental protection
Neoclassical economics hurts the environment
Capitalist market systems operate according to neoclassical economics
Enormous material wealth has been created
Assumptions of neoclassical economics contribute to environmental degradation:
Resources are infinite or substitutable
We should discount the future
All costs and benefits are internal
All growth is good
Assumption: resources are infinite
Economic models treat resources and workers as infinite, substitutable, and interchangeable
Once used up, a replacement resource will be found
Some resources can be replaced but some cannot
Nonrenewable resources (fossil fuels) can be depleted
Renewable resources (forests) can also be used up
Assumption: discount long-term effects
A future event has less value than a present one
Future events are discounted:
Short-term costs and benefits are more important than long-term costs and benefits
Present conditions are more important than future ones
We ignore the long-term consequences of policy decisions
Environmental problems unfold gradually
Discounting causes us to downplay environmental impacts of pollution and resource
degradation
Assumption: costs and benefits are internal
Only the buyer and seller experience costs and benefits associated with exchanging goods or
services
Pricing ignores social, environmental, or economic costs of pollution and degradation
Taxpayers bear the burden of paying these costs
External costs affect people other than buyers or sellers
Health problems, resource depletion, property damage
Ignoring external costs creates a false impression of the consequences of choices
Laws and regulations address external costs
People suffer from external costs
People 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 good
Economic growth is needed to keep jobs and social order
It creates opportunities for poor to become wealthier
Progress is measured by economic growth
But economic growth does not ensure well-being
Affluenza - material goods do not always bring contentment to those who can afford
them
Runaway growth can destroy our economic system
Resources are ultimately limited
We live in a growth-oriented economy
Modern global economic growth is unprecedented
Americans are in a frenzy of consumption
Economic 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 forever
Resources 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 economics
Ecological economics: civilizations cannot overcome environmental limitations
Uses principles of ecology and systems science
Natural systems are models for sustainability
Calls for revolution
Ecological economists advocate steady-state economies:
Economies that mirror natural ecological systems
They don’t grow nor shrink but stay stable
Quality of life increases through technological and behavioral changes
Environmental economics
Environmental economics: unsustainable economies have high population growth and
inefficient resource use
We can attain sustainability within current economic systems
Calls for reform
Economies grow by modifying neoclassical economics to increase efficiency through
technology
Environmental economists assign monetary values to ecosystem goods and services
Integrating them into traditional cost-benefit analysis
Valuing ecosystem goods and services
The market ignores/undervalues ecosystem services
Nonmarket 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 resource
Measure the money, time, or effort expended to travel to parks for recreation
Compare housing prices in different areas to infer the dollar value of landscapes, views, and
peace and quiet
Measure 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 combined
Protecting land gives 100 times more value than converting it to agriculture, logging,
or fish farming
Businesses are responding to concerns
Industries, businesses, and corporations make money by “greening” their operations
Recycling, cutting energy use, etc., reduces costs, and increases profits
In 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 fail
Market 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 regulations
Taxing harmful activities
Designing economic incentives to promote fairness, conservation, and sustainability
Environmental policy
Once society agrees that a problem exists, it may persuade its leaders to solve it through
policy
Policy is a formal set of general plans and principles to address problems and guide decision
making
Public policy are governmental laws, regulations, orders, incentives, and practices to
advance societal welfare
Environmental 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 problems
Science, ethics, and economics help formulate policy
Science provides information and analysis
Ethics and economics clarify how society can address problems
Policies prevent the tragedy of the commons
Capitalist markets are driven by short-term profit
Not long-term social or environmental stability
Little incentive to minimize impacts
Market failure justifies government intervention
Environmental policy tries to protect environmental quality and natural resources while
promoting equity or fairness in resource use
Tragedy 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 costs
Free 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 others
Private voluntary efforts are less effective than public policies, where everyone
sacrifices
Environmental policies also promote fairness by eliminating external costs
Policies ensure that parties do not use resources in ways that harm others
Framework of U.S. environmental policy
The U.S. is a good model to understand environmental policy
It has pioneered innovative policies
Its policies serve as models for other countries
Understanding 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 agencies
Regulations are specific rules to achieve objectives of broadly written statutory laws
State and local governmental policies
The structure of the federal government is mirrored at the state level
But state laws cannot violate principles of the U.S. Constitution
If laws conflict, federal laws take precedence
California, New York, New Jersey, and Massachusetts have strong environmental laws
Well-funded agencies
Citizens value protecting the environment
Early U.S. environmental policy
From 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 lands
Surveying and readying them for sale
Settlement increased prosperity for citizens
Relieved crowding in eastern cities
Displaced millions of Native Americans
People believed the land was infinite and inexhaustible
Typical laws from the 1780s to late 1800s
Homestead Act (1862): anyone could buy or settle on 160 acres of public land
Typical laws from the 1780s to late 1800s
General Mining Act (1872): people could mine on public land for $5/acre with no
government oversight
Typical laws from the 1780s to late 1800s
Timber 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. policy
Public 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 conservation
The 1964 Wilderness Act preserves pristine land
The third wave of U.S. environmental policy
In 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 policy
Ohio’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 Quality
Requires an Environmental Impact Statement (EIS)
For any federal action that might significantly impact the environment
To assess the environmental impacts of any federally-funded project
An EIS usually does not halt projects
Provides incentives to decrease damage
Grants citizens input into the policy process
The EPA shifts environmental policy
In 1970, President Nixon’s executive order created the Environmental Protection Agency
(EPA)
To develop an integrated approach to environmental policy
The EPA:
Conducts and evaluates research
Monitors environmental quality
Sets and enforces standards for pollution levels
Assists states in meeting standards and goals
Educates the public
Significant environmental laws
The public demanded a cleaner environment
Environmental problems needed tough regulations
Thousands of laws protect health and environmental quality in the U.S.
Environmental policy changes over time
Major advances in environmental policy in the 1960s and 1970s occurred because:
Strong evidence of environmental problems existed
People 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 regulation
By 1990, many felt that regulations were too strict
Imposed economic burdens on people and businesses
George 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 policy
Other nations have increased attention to issues
The 1992 Earth Summit in Rio de Janeiro, Brazil
The 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 policy
International law is vital to solving transboundary issues
Customary 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 policy
International organizations influence nations through:
Funding, economic or political pressure, and media attention
United Nations (UN): plays an active role in policy
Sponsors conferences, coordinates treaties, publishes research
UNEP (United Nations Environment Programme) promotes sustainability
Research, outreach activities
Provides information to policymakers and scientists
The World Bank and European Union
The World Bank is one of the largest funding sources for economic development in poor
countries
Dams, irrigation, infrastructure, etc.
Funds unsustainable, environmentally damaging projects
The European Union (EU) seeks to promote Europe’s unity and its economic and social
progress
Can sign binding treaties and enact regulations
Sees environmental regulations as barriers to trade
The World Trade Organization (WTO)
Represents multinational corporations
Promotes free trade
Can impose penalties on nations that don’t comply with its directives
Interprets environmental laws as unfair barriers to trade
Brazil and Venezuela filed a complaint against U.S. regulations requiring cleanerburning fuel
The WTO agreed with Brazil and Venezuela, despite threats to human health
Critics charge the WTO aggravates environmental problems
International treaties can weaken protection
International treaties allow industries and corporations to weaken environmental protection
laws
They see laws as barriers to trade
Under 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 cows
Canada 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
NGOs
Nongovernmental organizations (NGOs) are entities that influence international policy
Some do not get politically involved
Example: The Nature Conservancy
Others 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 problem
Requires scientific inquiry and data collection
Step 2: Pinpoint causes of the problem
Step 3: Envision a solution
Science plays a vital role here, too
Solutions also require social or political action
Step 4: Get organized
Organizations 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 law
Prepare a bill, or draft law, containing solutions
Find members of the House and Senate to introduce the bill and shepherd it through
committees
The bill may become law or die in various ways
How a bill becomes law
Before a bill becomes law, it must clear multiple hurdles
Step 7: Implement, assess, and interpret policy
Following a law’s enactment
Administrative agencies implement regulations
Policymakers evaluate the policy’s successes or failures
The courts interpret the law
Seven steps to making environmental policy
Theoretically, in the U.S.,
everyone has a voice and
can make a difference
But money wields influence
Some people and organizations
are more influential than others
Creating environmental policy has several steps
Requires initiative, dedication, and the support of many people
Science plays a role, but can be politicized
A nation’s strength depends on proper use of science
Governments use some tax money to fund research
Sometimes policymakers let ideology determine policy
Politicians ignore scientists and mislead the public
Government scientists have had their work censored, suppressed, or edited and
their jobs threatened
Unqualified people are put into powerful positions
When 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 approaches
Strategy: lawsuits in the courts
Before legislation, lawsuits addressed U.S. policy issues
Individuals suffering from pollution sued polluters in court
Courts make polluters stop or pay fines
Industrialization and population growth made it harder to control pollution
Also, justices were reluctant to hinder industry
People saw legislation and regulation as more effective in protecting health and safety
Strategy: command and control
Command-and-control approach: a regulating agency prohibits actions, or sets rules or
limits
Threatening punishment for violators
This is the approach used for most environmental laws and regulations enforced by agencies
today
This simple approach has worked well
It brings cleaner air, water, safer workplaces, and healthier neighborhoods
Strategy: economic policy tools
People don’t like the top-down approaches that dictate particular solutions to problems
Alternative approaches channel innovation and economic policies to benefit the public:
Promote desired, and discourage undesired, outcomes
Encourage market competition to produce new solutions at lower cost
Strategies include:
Green taxes, subsidies, permit trading, and ecolabeling
Green taxes discourage unsustainability
Governments use taxes to benefit the public
Internalizing harmful external costs makes them part of the cost of doing business
Green taxes: tax environmentally harmful activities and products
Businesses reimburse the public for damage they cause
The 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 policy
Polluter-pays principle: the party that pollutes is held responsible for covering the costs of
its impacts
Widely used in Europe
Carbon taxes are controversial taxes on gasoline, coal-based electricity, and other fossil fuels
Used to fight climate change
Subsidies promote certain activities
Subsidy 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 burden
Subsidies can promote sustainability, but they have been used to support unsustainable
activities
The U.S. subsidizes logging, grazing, and mining
Benefits private parties while degrading publically held resources
Nations 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 money
In permit trading, a government-created market in permits for an environmentally harmful
activity
Businesses buy, sell, or trade these permits
Cap-and-trade emissions trading system: the government sets pollution levels (“caps”)
Permits let polluters emit some amount of pollution
Polluters can exchange (sell) permits
The government can set lower emission levels
Companies have an economic incentive to reduce emissions
A cap-and-trade system for air pollution
One U.S. cap-and-trade system decreased sulfur dioxide emissions
Cuts 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 consumers
Uses the marketplace to counteract market failures
Ecolabeling tells consumers which brands use environmentally benign processes
Dolphin-safe tuna,
labeling recycled
paper, etc.
Market incentives work at the local level
Municipalities charge residents for waste disposal according to the amount of waste
generated
Cities tax disposal of costly items (tires, motor oil)
Some cities give rebates for buying water-efficient appliances
Power utilities give discounts to those buying efficient lightbulbs and appliances
It is cheaper than expanding generating capacity
Conclusion
Environmental policy is a problem-solving tool
It uses science, ethics, and economics
Conventional command-and-control approach uses legislation and regulations to make
policy
It is the most common approach
Innovative economic policy tools are being developed
Environmental and ecological economists quantify the value of ecosystem services
Economic well-being does not need a trade-off with environmental quality