Unit 20 — Economics of the Environment: Comprehensive Bullet-Point Notes

World Commodity Prices, Resources, and the Ehrlich–Simon Debate

• Figure 11.7 & 20.1 link oil price/consumption to resource scarcity debates

  • 1970s & 2000s oil shocks show steep, inelastic short-run supply & demand curves In economics, a trade-off refers to a situation where making one choice means giving up something else. It highlights the compromises involved when resources or objectives are limited. From the reading, a clear example of a trade-off is illustrated in the "Feasible consumption–environment set (Figures 20.13 & 20.14)", where policymakers face a decision between maximizing consumption (C) and improving environmental quality (E). The frontier of this set shows that to increase one, there is typically a sacrifice in the other, meaning a trade-off between economic output and environmental goals. Similarly, the Brownsville model regarding bargaining over wages, pollution, and jobs (Figure 20.15) demonstrates a trade-off between higher wages for citizens and better environmental quality.

  • Doubling of proven oil reserves (to 1.7 trn barrels, 1981–2014) despite >1 trn barrels extracted

• Ehrlich–Simon bet (1980–1990)

  • Basket: copper, chromium, nickel, tin, tungsten

  • Real price fell from 1000\to423.93 → Ehrlich paid 576.07

  • Illustrates long-run technological & substitution responses vs. short-run price spikes

• Long-run insight

  • Rising price ⇒ exploration & substitution → price falls

  • Falling price ⇒ curtailed investment & rising demand → price rises

  • Ratio “known reserves / annual production” roughly steady for many minerals over 200 yrs

Economic Activity & Biosphere Impacts

• Production & distribution inevitably alter the biosphere

  • Growing scarcity: unpolluted air, biodiversity, forests, clean water

  • Still abundant (but exhaustible): hydrocarbons, many minerals

• Environmental degradation can be progressive or abrupt (ecosystem collapse)

  • Grand Banks cod: centuries of stability → industrial fishing spike → collapse (Figure 20.3)

  • Amazon deforestation feedbacks (Figure 20.4): ↓forest → ↓rainfall → ↑fires → further ↓forest

• Key policy goal: design least-cost interventions that prevent tipping points and balance costs vs. benefits

Externalities, Missing Markets & Policy Instruments (Recap Units 4, 12)

• Negative external effect: private decision imposes unpriced cost

  • Examples: Weevokil pesticide, air travel CO₂

• Market failures → misallocation (Figure 20.5)

  • Possible remedies: taxes \uparrow\text{marginal private cost}=\text{marginal social cost}, quotas, bans, bargaining, collective ownership

• Small-scale agreements can succeed when social norms/enforcement exist; global problems require coordinated policy

Climate Change: Physical Facts & Stylised Challenges

• Stock-flow nature (bathtub model, Figure 20.7)

  • Stock: atmospheric CO₂ (ppm)

  • Inflows: ~36 Gt CO₂ / yr from fossil fuel & land-use change

  • Outflows: slow natural decay + forest absorption (even slowing via deforestation)

• Historical trends (Figure 20.6)

  • CO₂: 280 ppm (1800) → 400 ppm+ (now) at +2–3 ppm/yr

  • Temperature deviation tracks CO₂

• Carbon budget (Figure 20.8)

  • Additional 1–1.5 trn t CO₂ ⇒ ~2 °C warming

  • Burning all reserves/resources ⇒ 3–6 °C+ with catastrophic risk

• Five features complicating policy

  1. Cumulative stock matters (stabilising flow ≠ stabilising climate)

  2. Partial irreversibility

  3. Fat-tail catastrophic risk

  4. Global public-good → requires unprecedented cooperation

  5. Distributional conflicts (within & across generations)

Abatement & Cost–Benefit Framework

• Abatement policies: cleaner tech, reduced consumption, bans/limits

• Marginal abatement cost (MAC) curve (Figure 20.9)

  • Bars: cost €/t vs. potential Gt CO₂e

  • Low-cost: agri land-management; mid-cost: wind, solar, nuclear; high-cost: CCS retrofits

• Least-cost abatement curve (Figure 20.10)

  • Order policies by cost ⇒ downward-sloping MRT of € to abatement

• Feasible consumption–environment set (Figures 20.13 & 20.14)

  • Frontier slope = MRT =\frac{\Delta E}{-\Delta C}

  • Policymaker maximises utility where \text{MRS}=\text{MRT}

  • Example: optimal at E* = 62, consumption drop €50 bn

• Inefficient interior points (Figure 20.11) occur if high-cost measures are used first

Bargaining over Wages, Pollution & Jobs (Brownsville model)

• Axes: wage (x), environmental quality (y) (Figure 20.15)

  • Citizens’ “leave-town” indifference curve; firm’s “shutdown” iso-cost line

• Outcomes

  • Firm has all power → point A (low wages, poor environment)

  • Citizens have all power → point B (w* wage, E_max)

  • Any point on vertical segment AB Pareto-efficient; location depends on bargaining power, enforcement, information, lobbying

Cap-and-Trade (Quantity-Based with Price Signals)

• Steps

  1. Cap (total permits = E*)

  2. Allocate/auction permits

  3. Firms trade until P^* = \text{MAC}A = \text{MAC}B (Figure 20.16)

• SO₂ U.S. programme: 43 % cut, cost ≈1 ⁄ 50 of benefits

• EU ETS: over-allocation + demand slump → permit price crash (Figure 20.17); UK introduces price floor

• Carbon tax vs. cap-and-trade

  • Identical if \text{tax rate}=P^*, but tax offers price certainty, cap offers quantity certainty (prudential advantage near tipping points)

Valuing Environmental Benefits

• Contingent valuation (stated preference)

  • Exxon Valdez: ~$2.8 bn WTP survey

  • Sri Lanka elephants compensation study

• Hedonic pricing (revealed preference)

  • House price discounts near landfills (−7 % within 400 m ⇒ £2.86/t external cost)

• Green growth accounting: subtract natural-capital depreciation from GDP (Indonesia 7.1 % → 4 % growth when adjusted)

• WTP critiques: poor have low WTP; “right to livable environment” implies merit good; WTA generally higher than WTP

Dynamic Policies, Innovation & Lifestyle Change

• Porter hypothesis: regulation can spur efficiency & innovation

• Solar PV learning curve (Figure 20.19a): cost \downarrow from >$100/kWh (1976) to <$0.05 (2020)

• Levelised cost comparison (Figure 20.19b): wind/solar now competitive

• Olympiad Industries technology choice (Figure 20.20)

  • Pre-tax: slope -Pc/Ps=-\tfrac12 ⇒ coal-intensive tech A cheapest

  • Post-tax: slope -2 ⇒ solar-intensive tech B cheapest ⇒ innovation rent

• Lifestyle model (Figure 20.21)

  • Budget: free time vs. air-travel km; slope \text{MRT}=\frac{w}{P}

  • Fuel tax doubles P ⇒ slope halves (−200→−100) ⇒ substitution: work less, fly less (income + substitution effects)

Environmental Dynamics & Tipping Points

• Arctic sea-ice S-curve model (Figures 20.22–20.24)

  • EDC crosses 45° at: B (high-ice stable), A (tipping point unstable), C (no-ice stable)

  • Climate warming shifts EDC downward → B→B′, A→A′; eventually only low-ice equilibrium remains; positive feedback (albedo) drives collapse

• Prudential policy: stay safely left of tipping point; cap-and-trade preferable under uncertainty because it fixes quantity

Discounting Future Generations

• Present value PV=\frac{1}{(1+r)^t} (Table 20.10)

• Stern Review: r=1.4\% (1.3\%\text{ growth }+0.1\%\text{ catastrophe }) ⇒ carbon price ≈$360/t

• Nordhaus: r=4.3\% (adds ~3 % pure-time preference) ⇒ carbon price ≈$35/t

• Ethical debate: pure impatience vs. equal worth of future lives

International Cooperation & Conflicts of Interest

• Climate game = global prisoners’ dilemma

  • Reciprocity & inequality aversion can sustain cooperative equilibrium

• Obstacles: information gaps, lobbying by fossil-fuel interests, partisan belief divides

• Paris 2015: voluntary INDCs yet inadequate for 2 °C goal

Country Performance & Win-Win Potential

• CO₂ vs. GDP (Figure 20.25a): rich emit more, but big variance (US vs France)

• Environmental Performance Index (Figure 20.25b): richer → on average cleaner local environment, but Oman, Russia lag; Switzerland excels

• MAC including negative-cost measures (Figure 20.26)

  • Left-of-axis bars (LED lighting, insulation, efficient motors) — cost-saving & abatement

• Feasible frontier with win-wins (Figure 20.27)

  • Segment C→D slopes up: possible to raise both E & C

  • Unrealised potential highlights non-Pareto efficiency; bans/subsidies may accelerate uptake

Key Definitions & Formulas

• Abatement / Abatement policies

• \text{MAC}: marginal abatement cost

• \text{MRT}=\frac{\Delta E}{-\Delta C}; \text{MRS}=\frac{MUC}{MUE}

• Cap-and-trade vs. carbon tax (price- vs. quantity-based)

• Contingent valuation (stated) vs. hedonic pricing (revealed)

• Discount rate r and present value PV

• Tipping point & prudential policy

• Polluter-pays principle (fairness vs. effectiveness)

Ethical & Practical Takeaways

• Environmental policy intersects efficiency, fairness, uncertainty, and inter-generational equity

• Prudence demands acting before tipping points are crossed—even under uncertainty

• Abundant negative-cost (win-win) measures exist; market & behavioural frictions slow adoption

• Policy mix (taxes, caps, subsidies, bans, R&D support) should be context-specific, balancing cost-effectiveness with distributional goals

• Ultimately, future generations and non-human nature rely on present citizens’ social preferences and political institutions to speak for them

In economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite large price fluctuations, likely due to the fixed nature of production capacity in the immediate term.

In economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite large price fluctuations, likely due to the fixed nature of production capacity in the immediate terIn economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite large price fluctuations, likely due to the fixed nature of production capacity in the immediate term.

In economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite large price fluctuations, likely due to the fixed nature of production capacity in the immediate term.

In economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite large price fluctuations, likely due to the fixed nature of production capacity in the immediate term.

In economics, short-run supply refers to the quantity of a good or service that producers are willing and able to offer at various prices when at least one input is fixed. This means that producers cannot fully adjust all their production factors in response to price changes. As mentioned in the notes regarding oil prices, during the 1970s and 2000s oil shocks, the short-run supply curves were observed to be steep and inelastic, indicating that the quantity supplied did not significantly change despite larg