Lake Baikal pulp and paper mill

Introduction to Environmental
Economics
Dr. Maria Plotnikova

Readings
Economics of the Environment
Heal, Geoffrey, Climate Economics, 09.06.2008 - the article can be found under
Environment Topic on voxeu.org
Wara, Michael, Is the Global Carbon Market Working? (2007) Nature, vol. 445/8
pp. 595-596

Economics of Recycling and Waste

Wilson, David et al (2009) Building Recycling Rates through the Informal Sector,
Waste Management 29, pp. 629-635
Fahmi, Wael, and Keith Sutton (2006) Cairo's Zabaleen Garbage Recyclers:
Multi-Nationals' Takeover and state Relocation Plans, Habitat International 30,
pp. 809-837

Introduction
What is Environmental Economics?
concerned with relations between the
economy and the environment/natural
resources and ways to allocate resources,
regulate economic activity to achieve a
balance between economic, environmental
and other potentially conflicting goals of
society

Why do Environmental Problems persist?

What does Environmental

Economics study?
Natural Resources: Depletable,
renewable, non-renewable resources
Agricultural & Food Economics
Renewable, Common property resources
(fisheries, wildlife)
Biodiversity
Pollution, climate change
Connections between Development,
Poverty, Environment

Environment as an asset
Economics views environment as an asset
that produces (environmental) services
Positive economics (describes cause and
effect, value-free)
Normative Economics value-laden
Sustainability

Sustainability
At minimum the future generations should be left
no worse off than current generations
Sustainability as a non-decreasing well-being (the
value of total capital stock=natural+human-made
should not decline)
Sustainability as nondeclining value of natural capital
(assumes that natural and human-made capital are
not very substitutable)
Sustainability as nondeclining physical service flows
from selected resources

Why do environmental problems

persist?
Negative externalities
Consumers demand the good
Producers produce and pollute when it is the
cheapest way to dispose of waste

Many environmental goods have features

of public goods; public goods are
underprovided for
Solutions?

Externalities as a source of market

failure
An externality exists whenever the welfare
of some agent, either a firm or household
is affected by actions of some other
agents. There are positive and negative
externalities.

Negative externality
Under market allocation
The output of the commodity causing pollution
externality is too large
Too much pollution is produced
The prices of products responsible for pollution are
too low
As long as costs are external no incentives to search
for ways to yield less pollution per unit of output
Since release of pollutants into the environment is
cheap, recycling and reuse of pollutants is not done
as it incurs cost

Positive externality
External benefit/reduction of cost at no
cost to the recipient
Internalizing externalities: the beneficiary
should compensate the source of positive
externality
Network externalities: connection to
network of individual user increases
benefits to all users

Solutions

Understand institutional set-up

Increase environmental consciousness
(Re)Assign property rights
Regulation, incentives structure aimed at
desired outcomes vis--vis environment

Public Goods
Non-Rival
Non-Excludable
Examples of Public Goods

National defence
Immunization
Air, water quality
Transportation infrastructure (lighthouse)
Research and Development, Education?

Would private provision of public goods yield efficient

allocation? No, usually underprovided

Under-provision of Public goods

Inefficient (lower) provision of public goods
occurs because each one is able to become free
rider on each others contribution
Consumers capture the benefit provided by
other people because of non-rival, nonexcludable properties of public goods
think why fireworks are usually done by municipalities
and not private firms
free-riding from nonrival, hard-to-exclude
consumption

Mitigation vs. Adaptation policies

Pollution by one country imposes a ve externality on
neighbouring countries
Mitigation action by one country imposes a +ve
externality on other countries
Adaptation is a geographically-specific policy (local
public good)

Mitigation
Afforestation/decrease in deforestation
has added benefit of preserving
biodiversity
carbon market: industrial enterprises buy
carbon (permits) from farmers that create
carbon sinks

Carbon Dioxide Emission Estimates from Fossil-Fuel Burning,

Hydraulic Cement Production, and Gas Flaring for 1995

Source: Carbon Dioxide Information

analysis Centre, U.S. Dept of Energy

Top 20 Emitting Countries by Total FossilFuel CO2 Emissions for 2006

(1) China
(2) United States of America
(3) Russian Federation
(4) India
(5) Japan
(6) Germany
(7) United Kingdom
(8) Canada
(9) South Korea
(10) Italy
(11) Islamic Republic of Iran
(12) Mexico
(13) South Africa
(14) France
(15) Saudi Arabia
(16) Australia
(17) Brazil
(18) Spain
(19) Indonesia
(20) Ukraine

Source: Carbon Dioxide Information

analysis Centre, U.S. Dept of Energy

History of Environmental
agreements
1992 Earth Summit in Rio de Janeiro
Kyoto Protocol top-down approach will
expire in 2012
No specific targets for developing countries
US, Australia did not ratify Kyoto because of
no caps on developing countries emissions

Source: Carbon Dioxide Information

Analysis Centre, U.S. Dept of Energy

Global Climate Change Policy

Institutions
Intergovernmental Panel on Climate Change (IPCC)
evaluates scientific evidence on climate change
United Nations Framework Convention on Climate Change
(UNFCCC)
a framework document produced at Rio 1992 summit, set forth conference
of parties (COP) annual meetings to oversee implementation

The Kyoto Protocol

limits on total emissions by the industrialized countries, establishing a
prescribed number of "emission units"

International Emissions Trading

EU Emissions Trading Scheme
"cap-and-trade" scheme

Joint Implementation
Industrialized country can invest in an emission reduction project in another
industrialized country and get credits

Clean Development Mechanism

industrialized country can invest in an emission reduction project in a developing
country and obtains credits

Copenhagen UN Climate Change

conference
Unlike the Kyoto accord, it leaves up to the Governments
to introduce climate actions bottom-up approach
A stand-off between developing and developed countries
China does strongly oppose that its emission cuts be monitored
and verified
Brazil: developed nations should pay its historic debt more
financial support for developing countries esp. to prevent
deforestation in the Amazon region
Oppose legally binding promises as these would hamper
economic development

Copenhagen
Technology Transfer for Developing
countries
China wants developed countries to commit
1% of their GDP to fund climate changemitigation activities
Western companies are worried about
intellectual property rights in technology
transfer

Conservation vs. Geoengineering

the use of human-made changes to
the Earth's land, seas, atmosphere
Slow global warming
through reduced
atmospheric seeding: release
consumption, increased
sulfur particles or other aerosols
energy efficiency
into the atmosphere to reflect the
sun's rays back into space - same
as what happens when volcanoes
erupt;
But sulfur seeding could destroy
atmospheric ozone

Ocean fertilization with iron to

increase uptake of C02 from the
atmosphere
a rise in iron-limited phytoplankton
populations has adverse
consequences

Geological Carbon sequestration

and storage on a smaller scale

Climate sceptics
Bjorn Lomberg: For the most of the world
population, the environment is a distant
thing. In order to make them care for the
environment the same way we do in the
West, we have to make sure that their kids
stop dying
Climate-Industrial Complex
Money should be spent on R&D
Bring Cost-Benefit, cost-effectiveness into
environmental debate

Corporate Environmentalism
Greenwash: companies recognize the
consumers are willing to pay a premium
on green products
selective disclosure of positive
information about a companys
environmental or social performance,
without full disclosure of negative
information on these dimensions (Lyonn,
Maxwell, 2005)