Explained :- Environmental Economics

Environmental Economics  

Environmental Economics is a discipline within the economics which studies the economic impact of environmental policies. It applies the values and tools of mainstream macroeconomics and microeconomics to allocate environmental resources more efficiently. Environmental economists study the economics of natural resources from both sides - their extraction and use, and the waste products returned to the environment. They also study how economic incentives hurt or help the environment and how they can be used to create sustainable policies and environmental solutions.

Origins of Environmental economics

Environmental economics developed in its present form in the 1960s as a result of intensification of pollution and the increased awareness among the general public in Western countries about the environment and it's importance to our existence. Gradually, economists realized that to have an indefinite sustainable economic growth, the economic system needs to take into account the importance of environment. Economists, back then acknowledged that natural capital which performs life support, amenity and other functions cannot be supplied by man-made capital.

The growth of environmental economics in the 1970s and 1980s was initially within the neo classical paradigm. Thus there was a little concern for the relationship between the economy and the environment.

The limits of this approach led to develop what is now referred to as Ecological Economics.

What does an Environmental Economist do ?

Environmental economists research the economics of different environmental issues such as renewable energy use, construction of new hydroelectric power plants and pollution control measures. They usually conduct cost-benefit analysis of industrial economic activities or proposed regulations involving natural resources, mostly with the help of certain set of advanced statistical and computer software programs. They study the environmental impacts both positive and negative, of projects and policies from an economic perspective and in turn advise industry and government on the environmental impacts of decisions. They develop programs or policy recommendations to achieve environmental goals in "Cost-effective ways".

Environmental economists may study or suggest policy recommendations relating to -

• Externalities or unintentional effects on the environment or human health resulting from an economic activity.
• Cost-benefit analysis of environmental regulations.
• The economics of biofuels, solar power, waste management, land cleanup and other environmental technologies and industries.
• Valuation which is a concept that aims to assign currency values to natural resources. Valuation also deals with nature-provided "ecosystem services", such as erosion prevention by trees or water filtering by plants.
• Permit trading also known as "Cap and trade! This approach was successfully used to address acid rains in the 1990s. It is also been proposed as a policy tool to address the issues that cause global warming.

Environmental Economics Strategies

Environmental economists are concerned with identifying specific problems to be rectified, but there are many approaches to solving the same environmental problem. Some Environmental Economists prefer market based approach whereas some prefer government based approach. According to them: -

The government can have -

1. Strict environment regulations under which economic impact has to be estimated by the regulator.

2. It can impose a forcible limit on carbon emissions.

3. It can impose carbon emissions taxes on such industries.

4. It can also reduce the incentives of the consumers to buy such products which degrades the environment by providing alternative sustainable products.

Solutions suggested by Environmental economists to correct Negative externalities

• Environmental Regulations
• Quotas on pollution 
• Taxes and Tariffs on pollution
• Promoting the idea of Eco-innovation
• Better defined property rights
• Requires a Transnational approach

Example of Environmental Economics

One of the best example of the use of environmental economics is the cap and trade system.

But what is the Cap and trade system?

Cap and trade system is a market based approach to control the level of emissions of certain chemicals in the atmosphere. It is a system that caps the amount of carbon emissions that a given company may produce but also allows to "buy" rights to produce additional emissions from an another company that does not use the equivalent amount of its own allowance.

Corporate average fuel economy (cafe) regulations are another example of environmental economics in practice. These regulations are prescriptive and it aims to promote fuel efficiency. Another example of Environmental Economics is the introduction of Carbon tax to penalise industries that emits carbon.

Conclusion

The idea of environmental regulation and intervention evolves from the fact that a free market economy, left to its own will not promise the level of environmental quality that people want. Firms can pollute and rational consumers can make irrational choices without concern for the environmental consequences.

Environmental economists are skeptical about conventional legal approaches to environmental regulation and so called "command and control" approaches to environmental protection tends to be ineffective and excessively costly. Market mechanisms which use prices and taxes to discourage pollution are more effective and can achieve reduction in pollution at a lower cost.