Environmental Economics

Environmental economics uses the tools of economic analysis to address issues relating to the impacts of human activity on the natural environment, the ways in which those impacts affect human well-being, and the appropriate policy and regulatory responses to environmental problems. Such policy responses include targets (how much pollution is acceptable) and instruments (what means are available to achieve particular targets and their relative merits). Environmental economics emerged as a well-defined subdiscipline in the 1960s; in the 1970s and 1980s, most research considered local air and water pollution problems, with a key theme emerging that the use of economic incentive-based policy instruments had large potential efficiency gains compared with traditional (command-and-control) regulatory instruments. As the subject became more actively researched, other strands have become interwoven into environmental economics. First, recognition that sustainability of activity is as important as economic efficiency and that these two objectives may not always be mutually consistent. Second, system-level thinking showed that researchers cannot properly address environmental concerns without being aware of the material basis of economic activity and without considering the ecosystems within which particular configurations of resources are found—hence, the emergence of ecological economics and the linkage of natural resource economics with mainstream environmental economics. Early work in environmental economics was national or subnational in focus and heavily dominated by papers that addressed issues of particular concern to the more affluent Organisation for Economic Co-operation and Development (OECD) countries. This emphasis changed for several reasons. Global poverty reduction became more central to the international agenda, and governments became aware that dealing with poverty was a necessary condition for achieving sustainability goals. Globalization and greater economic interdependence of nations pointed to the need to bring international trade into the analysis of environmental problems. In addition, perhaps of most importance in terms of its effect on studies by environmental economists, it became evident that many of the most serious and least tractable environmental problems were international, with impacts spilling over national boundaries and thus requiring international policy coordination. In this vein, research has begun on solving acid rain pollution, ozone layer–depleting substances (both of which have been dealt with relative success), and global environmental problems such as biodiversity loss and climate change (the track record for both is far less impressive). One unifying feature throughout the whole discipline of environmental economics is the issue of valuation of non-marketed goods and services, including environmental amenities. A central precept within the discipline is that environmental problems arise because of the presence of externalities, particularly “public good” externalities. By definition, externalities are not priced. However, designing appropriate policy responses requires that shadow prices be imputed, and the huge literature on non-market valuation considers how these shadow prices can be estimated.