III.  Environmental Economics

A.  Ecological Economics

• Human economy is embedded in and part of the Earth's biogeochemical systems

• Methodological pluralism - a more comprehensive understanding of problems cna be obtained using a combination of perpectives

.

1.  Natural capital

• Available endowment of land and resources

• Purely economic analysis cannot fully capture the stock and flow dynamics of natural capital

• Need to look at impact of energy resources, water, chemical elements, and life forms

Ex. - Soil

• Issues:

a. Sustainable yield

• Harvest level that can be maintained without diminishing the stock or population of a resource

• Harvest > sustainable yield => natural capital decreases

.

b.  Absorptive capacity of the environment

• Ability of the environment to absorb and render harmless waste products

• Waste > absorptive capacity => natural capital decreases due to environmental degradation

.

c.  Substitutability

• Can human-made capital substitute for natural capital?

Ex. - Human made fertilizer

.

d.  Natural capital sustainability

• Conserve natural capital by limiting depletion and investing in renewal

. 

2.  Macroeconomic scale

• No limit to scale of the economy in standard macroeconomic theory

• Resource and environmental factors can impose limits on feasible levels of economic activity

.

a.  Empty world economics

• Economic system small relative to ecosystem

• Resource and environmental limits are unimportant

• Economic activity constrained by lack of human-made capital

b.  Full world economics

• Economic system large relative to ecosystem

• Human economic systems presses against ecosystem limits

• Environmental degradation will undermine economic activity regardless of how large stocks of human-made capital become

.

c.  Measuring the relationship between economic and ecological systems

(1)  Carrying capacity - the level of population and consumption that can be sustained by the planetary resource base

(2)  Ecological footprint - amount of land required to support the lifestyle of the people in a country

Per-Capita Ecological Footprint and Available Land, Selected Countries, 2012

.

Global Ecological Footprint, by Impact Type

. 

3. Long-term sustainability

a.  Approaches

(1)  Strong sustainability - limited substitutability between natural and human-made capital

• Natural capital levels should be maintained

.

(2)  Weak sustainability - natural and human-made capital are generally substitutable

• Natural capital depletion is justified if it is replaced with human-made capital

.

b.  Issues

(1)  Discounting the future

• Higher discount rate => greater incentive to exploit resources in the present

.

(2)  Intergenerational equity

• A fair distribution of resources, including human-made and natural capital, across human generations

.

(3)  Ecological complexity

• Presence of many different living and nonliving elements in an ecosystem, interacting in complex patterns => impacts of human actions may be unpredictable

.

(4)  Irreversibility

• Some human impacts on the environment may cause damage that cannot be reversed, e.g., species extinction

.

(5)  Precautionary principle

• Minimum interference with the operation of natural systems, especially where long-term effects cannot be predicted