Environmental Economics and Sustainability How you get Wall Street to hug a tree? John C Whitehead Department of Economics Appalachian State University Boone, NC Outline • • • • Environmental Economics Market Failure Sustainability Environmental Policy Environmental Economics • Environmental economics is a subfield of economics concerned with environmental issues (other usages of the term are not uncommon) In using standard methods of economics, it is distinguished from green economics which subsumes the nonstandard approaches to environmental problems, environmental science/environmental studies, or ecology • Source: Wikipedia Crucial Question • True or False: The optimal amount of pollution is zero Optimal Pollution $ MAC MD Pollution Market Failure • Problems – Negative externality – Public goods • Tools of environmental economists – Benefit-cost analysis – Cost effectiveness analysis Negative Externality • A market process generates negative spillovers • Example: pollution • Solution: government involvement that reduces pollution to the optimal level Public Goods • Non-rival • Nonexcludable • e.g., air, water, climate Benefit-Cost Analysis Cost-effectiveness analysis • Determination of the lowest cost environmental policy that can achieve the optimal pollution • Minimizing costs = maximize profits • Or: minimize costs → optimal pollution level is lower $ MAC MD Pollution Environmental Policy • • • • Free Market Environmentalism Moral Suasion Command and Control Economic Incentives Free Market Environmentalism • Why is my yard free of trash while the Blue Ridge Parkway is littered? • Coase Theorem • But: can’t privatize public goods like air, water, climate Moral Suasion • “Give a hoot, don’t pollute” • The native american’s tear • Voluntary carbon reductions … – Through public-private partnerships, the President is working with businesses to encourage voluntary, cost-effective greenhouse gas emission reductions Source: www.whitehouse.gov $ Command and Control MAC MD Pollution Economic Incentives • Abatement subsidies • Emissions taxes (e.g., carbon tax) • Tradeable emissions permits (i.e., capand-trade) • All three can produce the optimal pollution, are least-cost and provide incentives for dynamic efficiency Pros and Cons • Abatement subsidies: – Will increase profits – Profit motive might lead to an increase in the number of polluting firms – Might lead to an overall increase in pollution! Pros and Cons • Emissions taxes – Double-dividend: tax generates revenue (that can be used to reduce the budget deficit or reduce distortionary taxes) – Tax revenue = lost profits – Big-time Pros and Cons • Cap-and-trade – If permits are freely allocated there are no lost profits – Tradeable permits might lead to additional profits (but overall less than if not regulated) – Politically feasible … The Grand Experiment Five cap-and-trade bills in Congress; Zero carbon tax bills • [Red Cavaney, president and CEO of the American Petroleum Institute] expressed no preference for any of several potential congressional actions to limit greenhouse-gas emissions But he also said he doubted a carbon tax would be imposed any time soon “Most economists…say a carbon tax would be the most efficient way to maximize reductions,” he said “But…if you talk to political advisors, that’s the last vote they’ll take.” Sustainability • Sustainability is an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future … the Brundtland Commission, … defined sustainable development as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs" • Source: Wikipedia Alternative definition • Sustainability is achieved with correction of environmental market failures • Optimal pollution • Cost-effective policies [...]... lead to an overall increase in pollution! Pros and Cons • Emissions taxes – Double-dividend: tax generates revenue (that can be used to reduce the budget deficit or reduce distortionary taxes) – Tax revenue = lost profits – Big-time Pros and Cons • Cap -and- trade – If permits are freely allocated there are no lost profits – Tradeable permits might lead to additional profits (but overall less than if... regulated) – Politically feasible … The Grand Experiment Five cap -and- trade bills in Congress; Zero carbon tax bills • [Red Cavaney, president and CEO of the American Petroleum Institute] expressed no preference for any of several potential congressional actions to limit greenhouse-gas emissions But he also said he doubted a carbon tax would be imposed any time soon “Most economists…say a carbon tax... would be the most efficient way to maximize reductions,” he said “But…if you talk to political advisors, that’s the last vote they’ll take.” Sustainability • Sustainability is an attempt to provide the best outcomes for the human and natural environments both now and into the indefinite future … the Brundtland Commission, … defined sustainable development as development that "meets the needs of the present... MAC MD Pollution Economic Incentives • Abatement subsidies • Emissions taxes (e.g., carbon tax) • Tradeable emissions permits (i.e., capand-trade) • All three can produce the optimal pollution, are least-cost and provide incentives for dynamic efficiency Pros and Cons • Abatement subsidies: – Will increase profits – Profit motive might lead to an increase in the number of polluting firms – Might lead...Cost-effectiveness analysis • Determination of the lowest cost environmental policy that can achieve the optimal pollution • Minimizing costs = maximize profits • Or: minimize costs → optimal pollution level is lower $ MAC MD Pollution Environmental Policy • • • • Free Market Environmentalism Moral Suasion Command and Control Economic Incentives Free Market Environmentalism • Why is my yard free of trash while... Ridge Parkway is littered? • Coase Theorem • But: can’t privatize public goods like air, water, climate Moral Suasion • “Give a hoot, don’t pollute” • The native american’s tear • Voluntary carbon reductions … – Through public-private partnerships, the President is working with businesses to encourage voluntary, cost-effective greenhouse gas emission reductions Source: www.whitehouse.gov $ Command and. .. defined sustainable development as development that "meets the needs of the present without compromising the ability of future generations to meet their own needs" • Source: Wikipedia Alternative definition • Sustainability is achieved with correction of environmental market failures • Optimal pollution • Cost-effective policies