ENVIRONMENTAL AND NATURAL RESOURCE ECONOMICS

I. Economic Analysis of Environmental Issues

A. Introduction:  The Economy and the Environment

• Important events in modern environmental history:

1962:	The publication of Rachel Carson’s Silent Spring, widely recognized as the catalyst of the modern environmental movement, details the dangers posed by excessive pesticide use.
1964:	The passage of the Wilderness Act in the United States, which protects public lands that are “untrammeled by man, where man himself is a visitor who does not remain.”
1969:	The Cuyahoga River in Ohio is so polluted by oil and other chemicals that it catches on fire, prompting widespread concern about water pollution and eventually the passage of the Clean Water Act in 1972.
1970:	The creation of the Environmental Protection Agency by President Richard Nixon. Also, over 20 million participate in the first Earth Day on April 22.
1972:	The creation of the United Nation’s Environment Programme (UNEP), headquartered in Nairobi, Kenya.
1979:	The partial meltdown of the Three Mile Island nuclear reactor in Pennsylvania raises concerns about the safety of nuclear energy. These concerns are exacerbated by the explosion of the Chernobyl reactor in the Soviet Union in 1986.
1987:	The United Nations’ Brundtland Commission publishes “Our Common Future,” which defines sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”
1992:	The Rio Declaration on Environment and Development recognizes “the integral and independent nature of the Earth, our home,” and lists 27 principles of sustainable development including reducing global inequities, international cooperation, and the promotion of an economic system that addresses environmental problems.
1997:	The Kyoto Protocol is negotiated, the first international treaty that commits ratifying nations to reduce their greenhouse gas emissions. Although rejected by the United States, the treaty was ratified by 191 nations and entered into force in 2005.
2002:	The Johannesburg Declaration on Sustainable Development recognized that “humanity is at a crossroads” and there exists “a collective responsibility to advance and strengthen the . . . pillars of sustainable development—economic development, social development, and environmental protection.”
2009:	Nations participating in climate change talks in Copenhagen agree that actions should be implemented to limit eventual global warming to no more than 2°C, though no binding commitments are made to reduce emissions.
2015:	The Paris Agreement on climate change, approved by 195 countries, calls for a “global peaking of greenhouse gas emissions as soon as possible” with a goal of “holding the increase in global average temperature to well below 2°C above pre-industrial levels.” Over 150 countries submit plans to limit their greenhouse gas emissions.

1.  Economic approaches to the environment

a.  Environmental economics

• Applies mainstream economic principles to environmental and natural resource issues

• Main principles:

(1)  The theory of environmental externalities

(2)  The optimal management of common property and public goods

(3)  The optimal management of natural resources over time

(4)  The economic valuation of environmental goods and services

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b.  Ecological economics

• Brings together viewpoints from different disciplines and views the economic system as a subset of the broader ecosystem and subject to biophysical laws

• Core concepts:

(1)  The economic system is a subset of the broader ecological system

(2)  Sustainability should be defined according to ecological, rather than economic, criteria

(3)  It is essential to rely upon a range of academic disciplines and perspectives, in addition to economics, to provide insight into environmental issues

2.  Circular flow model

a.  Standard

b.  Expanded

3.  Economic growth

• Gross Domestic Product (GDP) - total market value of all final goods and services produced within a national border in a year

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a.  Standard growth model

GDP = population * per capita GDP

GDP growth rate = population growth rate + per capita GDP growth rate

Per capita GDP growth rate = GDP growth rate - population growth rate

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• Depends on accumulation of capital and technological progress to increase productivity

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b.  Ecological economics

• Other important factors:

(1)  Energy supply

(2)  Supplies of land and natural resources (natural capital)

(3)  Absorptive capacity of the environment - the ability of the environment to absorb and render harmless waste products

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4.  Environmental trends

• See impacts on:

a.  Atmosphere

b.  Land

c.  Water

d.  Biodiversity

e.  Chemicals and waste

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5.  Optimists and pessimists

a. Pessimists

• Thomas Malthus (1798) - Essay on the Principle of Population, Jay Forrester (1972) - The Limits to Growth

• Society will run out of resources

• Sudden collapse of economic system, decreased food production, massive deaths ("overshoot and collapse")

• Negative environmental consequences - climate change, species loss, pollution, deforestation, depletion of water, buildup of toxic waste

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b.  Optimists

• Julian Simon (1981) - The Ultimate Resource

• Standard of living rising

• Economic and political systems respond to scarcity

• Higher income => increased demand for environmental quality, increased ability to pay

• Knowledge and technology can overcome limits

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6.  Sustainable development

• Concerned with maintenance of human well-being

• Issues:

a.  Population

• Increased population leads to increased demand for resources

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b.  Agriculture

• Modern techniques can have negative environmental consequences - chemical fertilizers, pesticides, heavy water use, mechanization requiring fossil fuels

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c.  Energy

• Can renewable energy sources supplant nonrenewable fossil fuels?

d.  Natural resources

• Need to manage resources to prevent overuse and depletion

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