Environmental Economics Notes

Unit 1: Environment and Sustainability (9 hours)

Introduction to Environmental Economics:
- Callen Ch 1:
  - The Role of Economics in Environmental Management
    - Pg 3
Economy–Environment Interdependence:
- Perman Ch 2:
  - The origins of Sustainability Problem (Pg 17)
Materials Balance Model:
- Callen Ch 1:
  - The Role of Economics in Environmental Management (Pg 4)
- Perman Ch 2.1.3.2:
  - The Origins of Sustainability Problem (Pg 23-24 Fig 2.2)
Drivers of Environmental Impact:
- Perman Ch 2 Foundations 2.2
  - The Drivers of Environmental Impact (Pg 28-36)
Environmental Kuznets Curve Hypothesis (EKC):
- Perman Ch 2 Foundations 2.2.5.2
  - Affluence and Technology: the EKC (Pg 36-40)
Concepts of Sustainability:
- Perman Ch 4:
  - Concepts of Sustainability 4.2 Economists on Sustainability (Pg 86)
  - The Hartwick rule (Pg 89)
  - Weak and strong sustainability (Pg 90)
  - Resilience (Pg 93)

Unit 2: Environmental Policies (12 hours)

Conventional Policy:
- Environmental Standards
- Efficiency of Environmental Standards
- Command and Control Approach
  - Callen Ch 3:
    - Modeling Market Failure (Pg 56-79)
  - Callen Ch 4:
    - Conventional Solutions to Environmental Problems: The Command- and-Control Approach (Pg 80-97)
Market Based Policy:
- Pollution Charges
- Environmental Subsidies
  - Callen Ch 5:
    - Economic Solutions to Environmental Problems: The Market Approach (Pg 98-100, 107)
- Deposit Refund System
  - Callen Ch 5:
    - Economic Solutions to Environmental Problems: The Market Approach (Pg 109)
- Pollution Permit Trading Systems
  - Callen Ch 5
    - Economic Solutions to Environmental Problems: The Market Approach (Pg 114-123)

Unit 3: Environmental Planning & Analytical Tools (12 hours)

Environmental Risk Analysis
- Concept of Risk
- Risk Assessment and Risk Management
  - Callen Ch 6:
    - Environmental Risk Analysis (Pg 125-144)
Assessing Benefits for Environmental Decision Making
- Environmental Benefits
- Conceptual Issues
  - Callen Ch 7:
    - Assessing Benefits for Environmental Decision Making (Pg 146-)
- Approaches to Measuring Environmental Benefits
  - Physical Linkage Approach
  - Behavioral Linkage Approach
    - Direct and Indirect Estimation Methods
      - Callen Ch 7:
        Assessing Benefits for Environmental Decision Making (Pg 153-168)
- Benefit-Cost Analysis
  - Callen Ch 8:
    - Assessing Costs for Environmental Decision Making (Pg 170-185)
  - Callen Ch 9:
    - Benefit Cost Analysis in Environmental Decision Making (Pg 186-203)

Unit 4: Global Environmental Management and Regulations (12 hours)

Ozone Depletion and Climate Change
* Callen Ch 13
* Global Air Quality: Policies for Ozone Depletion (Pg 288-298) and Climate Change (Pg 299-327)
International Collaborations for Environment * Callen Ch 20 * Sustainable Development International Environmental Agreements and International Trade (Pg 479-486)
- Montreal and Kyoto Protocol, Paris Agreement
  - Callen Ch 20
    - Sustainable Development International Environmental Agreements and International Trade (Pg 487-503)

Module 1: Modeling Environmental Problems

Environmental pollution and ecological problems are playing an increasingly significant role in business decisions and corporate planning.
The world has become more aware of and sensitive to ecological damage:
- People are changing consumption patterns towards environmentally responsible choices.
- Governments are enacting environmental legislation.
- Firms are adding environmental concerns to business priorities to comply with regulations and remain competitive.
Economic analysis uses models to explain strategic decision making and economic conditions in the marketplace.
- Models simplify by eliminating unnecessary detail to test theories and make predictions about market behavior.
Module 1 focuses on basic models for understanding environmental issues:
- Materials balance model: Illustrates linkages between economic activity and nature, showing how damage and resource depletion occur.
- Market process: Reviews key concepts like supply and demand and economic efficiency.
- Market failure: Explains how environmental problems arise when the market fails, illustrating sources and conditions of these failures.

Chapter 1: The Role of Economics in Environmental Management

Society must protect Earth’s resources while continuing economic development.
Economic theory provides analytical tools to:
- Explain the interaction of markets and the environment.
- Analyze the implications of that relationship.
- Identify opportunities for effective solutions.
Natural resource economics and environmental economics are two disciplines that formally analyze environmental issues.

Economics and the Environment

Economic theory explains observed reality, including environmental problems.
Pollution and resource depletion arise from decisions made by households and firms regarding consumption and production.
Economic activity draws on natural resources and generates by-products that can contaminate the environment.

Circular Flow Model

Illustrates real (nonmonetary) and monetary flows between households and firms in factor and output markets.
- Real flow: Counterclockwise, resources to firms, goods/services to households.
- Money flow: Clockwise, income to households, expenditures to firms.
The size of flows are affected by:
- Population growth
- Technological change
- Labor productivity
- Capital accumulation
- Natural phenomena.
The circular flow model does not show the linkage between economic activity and the environment.

Materials Balance Model

Positions the circular flow within a larger schematic to show the connection between economic decisions and the natural environment.
Flow of Resources:
- Natural resources flow from the environment to the economy (households/firms).
- Primary focus of natural resource economics.
Flow of Residuals:
- Raw materials return to nature as by-products or residuals, such as gases, wastewaters and solid wastes.
- Most residuals are released as gases to the atmosphere; some are absorbed naturally.
- Liquid and solid residuals are potential threats to health and the ecology.
- Important to delay the flow of residuals: Recovery, recycling, and reuse
  - Even recycled/reused products eventually become residuals returned to nature.
  - Recycling efforts are short-term measures, but the Materials balance model shows that all resources drawn from the environment ultimately are returned there in the form of residuals.
  - Environmental economics focuses on the flow of residuals from economic activity back to nature.

Using Science to Understand the Materials Balance

First law of thermodynamics: Matter and energy can neither be created nor destroyed.
- In the long run, materials drawn from nature must equal residuals returned.
- Raw materials are converted, but nothing is lost.
Second law of thermodynamics: Nature’s capacity to convert matter and energy is not unlimited.
- During energy conversion, some energy becomes unusable (entropy).
- Economic activity depends on a finite process.
These scientific laws indicate that:
- Every resource becomes a residual that can damage the environment.
- Conversion to other matter and energy is limited.
The connections between economic activity and nature motivate the discipline of environmental economics.

Understanding Environmental Damage

Environmental economics identifies and solves environmental damage associated with the flow of residuals.
Pollution is the presence of matter or energy with undesired effects on the environment:
- Can be defined by fundamental constituents, location, or quantity.
Finding solutions to environmental damage depends upon identifying the causes, sources, and scope of the damage.
Causes of Environmental Damage:
- Natural pollutants: Arise from nonartificial processes in nature, e.g., particles from volcanic eruptions.
- Anthropogenic pollutants: Human-induced residuals associated with consumption and production.
- Environmental economists are primarily concerned about anthropogenic pollutants for which nature has little or no assimilative capacity.
Solution: www.epa.gov/OCEPAterms - EPA’s Web site provides an online glossary of environmental terms.

Chapter 2: The Origins of the Sustainability Problem

Human population rose drastically over the past century, and material demands increased rapidly.
Economic growth was seen as the solution to poverty, but the world’s resource base is limited, and ecosystems are fragile.
The sustainability problem is how to alleviate poverty without undermining the natural environment to harm future economic prospects.

2.1 Economy–environment Interdependence

Economic activity takes place within the natural environment, which is a thermodynamically closed system exchanging energy but not matter with the universe.
The environment performs functions like providing resources and life-support services.
- Economic activity includes production and consumption, drawing upon environmental services.
- Some production output is added to human-made capital stocks.
- Production uses extracted resources from the environment, giving rise to wastes.
- Consumption uses a flow of amenity services to individuals directly.

2.1.1 The Services That the Environment Provides

Natural resources used in production are either stock or flow resources.
- Flow resources: Current use does not affect future availability (e.g., solar radiation).
- Stock resources: Current use affects future availability.
  - Renewable resources: Biotic populations with potential for natural reproduction.
  - Non-renewable resources: Minerals, including fossil fuels.
For renewable resources, a sustainable yield is when harvest equals natural growth.
For non-renewable resources, more use now means less future use.
Fossil fuel combustion is irreversible and produces waste emissions.
- ‘Pollution’ is a waste discharge that gives rise to perceived problems (flow or stock).
- Flow model: Pollution results from a residual flow rate exceeding assimilative capacity.
Amenity services flow directly from the environment to individuals (e.g., recreation).
The environment provides life-support functions (e.g., breathable air) and the biosphere functions in such a manner that humans can exist in it.
The interdependencies between economic activity and the environment are pervasive and complex.
Interactions between environmental functions can occur;
- For example, increased sewage discharge in an estuary can interfere with recreational capacity and impact non-commercial marine species.

2.1.2 Substituting for Environmental Services

Recycling involves intercepting the waste stream and returning it to production:
- Recycling substitutes extractions from environment.
Capital can substitute for environmental services.
- Natural capital, capital equipment.
- An example is a sewage treatment plant.
Energy conservation can substitute capital for resource base functions (e.g., insulation).
Artificial environments have enabled humans to live outside the biosphere in small numbers and for limited periods, showing (limited) substitution for life-support functions.
Capital via virtual reality devices will make it possible to experience many of the sensations involved in being, in a natural environment without actually being in it.
Human capital enables technical change, which can reduce demands on environmental functions.
Substitution as between components of the flows are possible and affect the demands in the environment.

2.1.3 Some Environmental Science

Review of elements important to economy–environment interdependence.

2.1.3.1 Thermodynamics

Thermodynamics is the science of energy (the potential to do work or supply heat).
Systems: open, closed, and isolated.
First law of thermodynamics: Energy can neither be created nor destroyed, only converted.
Second law of thermodynamics: Heat flows spontaneously from hotter to colder, and heat cannot be transformed into work with 100% efficiency. Energy conversions are irreversible.
Entropy is a measure of unavailable energy that increases with all energy conversions.
Economic scarcity is tied to the laws of thermodynamics: If energy conversion processes were 100% efficient, resources would last forever.

2.1.3.1.1 Recycling

The basic laws of thermodynamics are generally taken to mean that: Given enough available energy, all transformations of matter are possible, at least in principle, complete material recycling is possible (complete recycling).
Nicholas Georgescu-Roegen: