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Introduction to environmental and natural resource economics Economists’ perspective on the environment Linkages between the economy, the environment,

and natural resources The economic approach to decision making

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Economists’ view of the environment For economists, the environment is an asset. As an asset, the environment provides:

Life-sustaining services (water and clean air), Aesthetic services, (scenery, recreation), Raw materials (wood, minerals, agricultural

produce), Energy (coal, oil, natural gas, nuclear, hydro), and A waste sink (assimilative capacity).

We can think of the environment as the stock of natural capital.

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Environment as an asset

Generating environmental services over time means that we must be concerned about preserving the stock of natural capital.

Other important assets: Produced capital (machinery, tools, buildings), Human capital (skills, experience, education)

If natural capital is insufficient, our standard of living will decline

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Environment and economic linkages

Water and Clean Air

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Materials flow First law of thermodynamics – energy and

matter cannot be created or destroyed. Flow of materials from environment into

economic system must either accumulate or return to the environment.

When accumulation stops, mass in equals mass out.

This means that when waste accumulation reaches maximum, further wastes must flow back into the environment.

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Materials flow

Production of goods and services

Energy and raw materials

Goods consumed (used up)

Additions to inventory

Waste products

Absorptive capacity of the environment

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Materials flow

Actions to reduce waste flows: Increase efficiency in the production of raw

materials and energy, Use fewer raw materials and less energy in the

production of goods and services (efficiency, recycling),

Consume fewer goods.

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Materials flow

Excessive wastes can depreciate natural capital.

When wastes>absorptive capacity, services from natural capital decline.

Environmental economics has do to with how much environmental damage can be sustained without depleting our natural capital.

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The economic approach Positive economics – describes what is, or

what will be If the price of oil rises, what will happen to the

demand for hybrid vehicles? If the recession continues, what will happen to the

demand for oil? Normative economics – deals with what

ought to be How should we control greenhouse gases? How much forest should we preserve?

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Evaluating options using normative decision making All potential actions have both costs and

benefits What is the cost to you to attend class? What are the potential benefits?

Benefit/cost framework – if the benefits of an action exceed the costs, then the action is desirable

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Evaluating options using normative decision making B=benefits C=costs Rule: if B>C (or if B/C>1) then the action

should be done. Otherwise, oppose the action. Caveats:

Measuring benefits and costs is very difficult Other criteria are important (fairness, distribution)

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Summary so far The environment is an important asset

(natural capital) Squandering our natural capital will cause

our standard of living to decline The economy and the environment are

strongly linked (what goes in must come out) Actions should be evaluated by considering

the benefits and the costs (normative framework)

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Case Study: Global Warming Greenhouse gas accumulation is raising the

earth’s surface temperature Greenhouse gases are generated by the

release of CO2, NOx, methane, and CFCs into the atmosphere

Range of temperature increase: 2.5o – 10.5o by 2100

Context: in the last ice age, surface temperature was 9o cooler than today

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Case Study: Global Warming Consequences of global warming:

Agricultural output Cold areas will get warmer, shifting production north Hot areas will get hotter, causing increase in arid lands

Natural ecosystems Natural systems cannot adapt this quickly Forest losses, species extinction, natural pests will

flourish Sea level rise

Warming of 4o or more raises probability of melting polar ice sheets

Causes sea levels to rise globally, threatening coastal life

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Economic framework

How much greenhouse gas is too much? Using the efficiency standard: can we assess

the benefits and costs of cutting greenhouse emissions?

Great uncertainties and irreversibilities exist Weight of opinion calls for some reduction

compared with business-as-usual

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Economic framework Is there a role for government? The market system will produce too much

greenhouse gas Policy options:

Command and control regulation – mandate specific pollution control technology

Clean technology policies – use regulation to require more efficiency; spending more on mass transit over highways

Incentive-based regulation – use market incentives to reduce CO2 emissions

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