Chapter 23: Economics, Environment, and Sustainability

A New Economic and Environmental Vision

• Economic growth and development
• Neoclassical Economists: view the earth's natural capital as a subset of a human economic system
• Environmentally sustainable economy
  • Ecological economists
  • Environmental economists
• Economic revolution aka sustainability revolution

23.1 How Are Economic Systems Related to the Biosphere?

Economic Systems Are Supported by Three Types of Resources

• Economic systems are supported by
  • Natural capital: Includes resources and services produced by the earth's natural processes, which support all economies and all life
  • Human capital, human resources: Includes people's physical and mental talents that provide labor, organizational and management skills, and innovation
  • Manufactured capital, manufactured resources: Includes people's physical and mental talents that provide labor, organizational and management skills, and innovation

Governments Intervene to Help Correct Market Failures

• Market failures
  • Provide public services
  • Inability to prevent the degradation of open-access resources
• No monetary value is assigned to natural capital

Economists Disagree

• Economic growth: Increased capacity to supply goods and services, requires increased production and consumption, requires more consumers
• High-throughput economy
• Economic development: Improvement of living standards
• Environmentally sustainable economic development
  • Environmentally beneficial
• Neoclassical economists: View the earth’s natural capital as part of a human economic system
• Ecological economists: View human economic systems as subsystems of the biosphere, and believe that conventional economic growth will become unsustainable
• Environmental economists
  • middle ground

23.2 How Can We Estimate Natural Capital, Pollution Control, and Resource Use?

• Economists have developed several ways to estimate:
  • Present and future values of a resource or ecosystem service
  • Optimum levels of pollution control and resource use
• Comparing the likely costs and benefits of environmental action is useful, but it involves many uncertainties

There Are Various Ways to Value Natural Capital

• Estimating the values of the earth’s natural capital
  • Monetary worth
• Estimate nonuse values
  • Existence value
  • Aesthetic value
  • Bequest value, the option value

Estimating the Future Value of a Resource Is Controversial

• Discount rate: Estimate of a resource’s future economic value compared to its present value
• Proponents of a high discount rate
  • Inflation
• Critics of a high discount rate
  • Encourages rapid exploitation of resources

We Can Estimate Optimum Levels of Pollution Control and Resource Use

• The marginal cost of resource production
  • The cost of removal goes up with each additional unit taken
• The optimum level of resource use
  • The intersection of supply and demand curves
• The optimum level for pollution cleanup
  • Equilibrium point

Cost-Benefit Analysis Is a Useful but Crude Tool

• The cost-benefit analysis follows guidelines
  • State all assumptions used
  • Include estimates of the ecological services
  • Estimate short-and long-term benefits and costs
  • Compare the costs and benefits of alternative courses of action There are always uncertainties

23.3 How Can We Use Economic Tools to Deal with Environmental Problems?

We Can Apply the Principle of Full-Cost Pricing

• Market price: Does not include indirect, external, or hidden costs
• Full-cost pricing: Includes estimated costs of harmful environmental and health effects of production
• Centrally Planned Economy: the government determines production and distribution
• Free Market Economy: private individuals and companies determine production and distribution

Subsidies Can Be Environmentally Harmful or Beneficial

• Perverse subsidies: Lead to environmental damage and should be phased out
• Lobbying groups
  • Influence governments
• Subsidies can also be used for environmental benefits

Environmental Economic Indicators Could Help Reduce Our Environmental Impact

• Measurement and comparison of the economic output of nations
  • Gross domestic product (GDP): Annual market value of all goods and services produced by all firms and organizations, foreign and domestic, operating within a country
  • Per capita GDP: Annual gross domestic product (GDP) of a country divided by its total population at midyear. It gives the average slice of the economic pie per person.
• Newer methods of comparison
  • Genuine progress indicator (GPI): GDP plus the estimated value of beneficial transactions that meet basic needs, but in which no money changes hands, minus the estimated harmful environmental, health, and social costs of all transactions
  • GDP plus estimated value of beneficial transactions

Tax Pollution and Wastes Instead of Wages and Profits

• Green taxes: So that harmful products and services are at the true cost
• Steps for successful implementation of green taxes
  • Phased in slowly, other taxes reduced, safety-net for the poor
• Costa Rica
  • 3.5% tax on market prices of fossil fuels

Environmental Taxes and Fees

Advantages

• Help bring about full-cost pricing
• Encourage businesses to develop environmentally beneficial technologies and goods
• Easily administered by existing tax agencies

Disadvantages

• Low-income groups are penalized unless safety nets are provided
• Hard to determine the optimal level of taxes and fees
• If set too low, wealthy polluters can absorb taxes as costs

We Could Label Environmentally Beneficial Goods and Services

• Product eco-labeling
  • Help consumers
• Greenwashing: Deceptive practice and spin of environmentally harmful products as green

Environmental Regulations Can Discourage or Encourage Innovation

• Environmental regulation: Control pollution and reduce environmental degradation
• Command and control approach
• Incentive-based environmental regulations
  • Uses economic forces
• Innovation-friendly regulations
  • It frees industries and allows time for innovation

Tradable Environmental Permits

Advantages

• Flexible and easy to administer
• Encourage pollution prevention and waste reduction
• Permit prices determined by market transactions

Disadvantages

• Wealthy polluters and resource users can buy their way out
• Caps can be too high and not regularly reduced to promote progress
• Self-monitoring of emissions can allow for cheating

23.4 How Can Reducing Poverty Help Us to Deal with Environmental Problems?

We Can Reduce Poverty

• Poverty
  • People cannot meet basic needs
  • One-fifth of the world’s population lives on less than $1.25 per day
• Reducing poverty benefits society
• Important measures
  • Combat malnutrition and infectious diseases
  • Enact universal primary school education
  • Stabilize population growth
  • Reduce total and per-capita ecological footprints
  • Large investments in small-scale infrastructure

Working Toward the Millennium Development Goals

• Millennium development goals
  • Sharply reduce hunger and poverty
  • Improve health care
  • Empower women
  • Environmental sustainability by 2015
  • Developed countries: spend 0.7% of the national budget toward these goals

23.5 Making the Transition to More Environmentally Sustainable Economics

We Are Living Unsustainably

• We are depleting natural capital
• Convert linear throughput economy to circular matter recycling and reuse economy
  • Mimics nature

Low-Throughput Economies Are More Sustainable

• Low-throughput economy
  • Based on energy flow and matter recycling
  • Reusing and recycling nonrenewable matter
  • Don’t use renewable resources too fast
  • Reduce waste with efficiency
  • Reduce harmful forms of consumption
  • Promote pollution prevention and waste reduction

We Can Shift to More Sustainable Economies

• Economic succession: New and more innovative businesses
• Green jobs→ Environmentally friendly jobs
• Require governments and industries to increase spending on research and development

Lessons From Nature Will Help Us in Making the Transition

• For the earth
  • Just so much and no more
  • Take what you need and leave your competitor enough to live
  • Never take more in your generation than you can give back to the next

Three Big Ideas

• Making a transition to more sustainable economies will require finding ways to estimate and include the harmful environmental and health costs of producing goods and services in their market prices
• Making this economic transition will also mean phasing out environmentally harmful subsidies and tax breaks, and replacing them with environmentally beneficial subsidies and tax breaks
• Another way to further this transition would be to tax pollution and waste instead of wages and profits and to use most of the revenues from these taxes to promote environmental sustainability and reduce poverty

Tying It All Together: Germany’s Transition and Sustainability

• A country can use economic policy to affect the energy market
• Economics can play a major role in determining the size of a country’s ecological footprint
  • Use renewable energy resources
  • Use full-cost pricing

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