What is environmental economics?
Environmental economics is the study of the profitable allocation, use and protection of the planet’s natural resources.
Economics, broadly defined, is the study of how humans produce and consume goods and services. Environmental economics focuses on how they use and manage limited resources in a way that serves the population while addressing concerns about environmental impact.
This helps governments weigh the pros and cons of alternative measures and designs. appropriate environmental policies.
- Environmental economics studies the impact of environmental policies and develops solutions to the resulting problems.
- Environmental economics can be based on prescriptions or on incentives.
- A major topic in environmental economics concerns externalities, that is, additional costs associated with business activity that are not paid by the company or its consumers.
- Another major topic in environmental economics is assigning a value to public goods, such as clean air, and calculating the costs associated with the loss of these goods.
- Since some environmental goods are not limited to a single country, environmental economics often requires a transnational approach.
Understanding environmental economics
The basic theory underlying environmental economics is that environmental amenities (or environmental goods) have economic value and that economic growth has costs that are not taken into account in more traditional models.
Environmental goods include things like access to clean water, clean air, wildlife survival, and general climate. Although it is difficult to price environmental goods, their loss can result in a high cost. Environmental assets are generally difficult to fully privatize and subject to tragedy of the commons.
The destruction or overexploitation of environmental assets, such as pollution and other types of environmental degradation, can represent a form of market failure because it imposes a negative repercussions. Environmental economists analyze the costs and benefits of specific economic policies aimed at correcting such problems and may conduct tests or theoretical studies on the possible consequences of these policies.
Strategies in environmental economics
In a prescriptive approach, the government dictates specific measures to reduce environmental damage. For example, they may ban highly polluting industries or require certain emissions control technologies.
Market-based policies use economic incentives to encourage desired behaviors. For example, cap-and-trade regulations don’t prohibit companies from polluting, but they impose a financial burden on those that do. These incentives reward companies for reducing their emissions, without dictating the method they use to do so.
The Environmental Protection Agency was created by President Richard Nixon in 1970.
The challenges of environmental economics
Since the nature and economic value of environmental goods often transcend national boundaries, environmental economics often requires a transnational approach. For example, an environmental economist might identify overfishing as a negative externality to be addressed.
The United States could impose regulations on its own fishing industry, but the problem would not be solved without similar action by many other countries. The global nature of these environmental problems has led to the rise of non-governmental organizations (NGOs) such as the Intergovernmental Panel on Climate Change (IPCC), which organizes annual forums for heads of state to negotiate international environmental policies.
Another challenge of environmental economics is the extent to which its findings affect other industries. More often than not, environmental economists’ findings can be controversial and their policy recommendations can be difficult to implement due to the complexity of the global market.
The presence of multiple carbon credit markets is an example of the chaotic transnational implementation of ideas from environmental economics. Fuel economy standards set by the Environmental Protection Agency (EPA) are another example of the balancing act required by policy proposals related to environmental economics.
In the United States, policy proposals from environmental economics tend to spark controversial policy debates. Leaders rarely agree on the magnitude of externalized environmental costs, making it difficult to develop substantive environmental policies. The EPA uses environmental economists to lead policy proposals related to the analysis.
These proposals are then examined and evaluated by legislative bodies. The EPA oversees a National Center for Environmental Economics, which emphasizes market-based solutions, such as cap and trade carbon emissions policies. Their priority policy issues include encouraging the use of biofuels, analyzing the costs of climate change and solving waste and pollution problems.
Example of environmental economics
A prominent contemporary example of the use of environmental economics is the cap-and-trade system. Companies purchase carbon offsets from developing countries or environmental organizations to offset their carbon emissions. Another example is the use of a Carbon tax penalize carbon-emitting industries.
Corporate Average Fuel Economy (CAFE) regulations are another example of environmental economics at work. These regulations are prescriptive and specify gallons per mile of gasoline for auto manufacturers’ cars. They were introduced in the 1970s to promote energy efficiency in an era of gas shortages.
What is the difference between environmental economics and ecological economics?
Environmental and ecological economics are two subfields of economic thought that study the interactions between human activity and the natural environment. The difference is that environmental economics studies the relationship between the environment and the economy, while ecological economics views the economy as a subsystem of a larger ecosystem.
What is the relationship between neoclassical economics and environmental economics?
Neoclassical economics is a general theory that focuses on supply and demand as the driving forces of economic activity. Environmental economics is based on the neoclassical model but places more emphasis on negative externalities, such as pollution and ecosystem loss.
What are the jobs in environmental economics?
Environmental economists can find easy employment at the Environmental Protection Agency or other environmental agencies at the state or local level. These specialists are responsible for enforcing regulations aimed at protecting the environment and calculating the economic costs of enforcing the regulations.