What is Environmental Economics?

Environmental economics is an area of economics that studies the financial impact of environmental policies. Environmental economists perform studies to determine the theoretical or empirical effects of environmental policies on the economy. This field of economics helps users design appropriate environmental policies and analyze the effects and merits of existing or proposed policies.

Key Takeaways

  • Environmental economics studies the impact of environmental policies and devises solutions to problems resulting from them.
  • The approach can either be prescriptive or incentive-based.
  • The two main challenges to environmental economics are its transnational nature and its impact on various moving parts of a society.

Understanding Environmental Economics

The basic argument underpinning environmental economics is that environmental amenities (or environmental goods) have economic value and there are environmental costs of economic growth that go unaccounted in the current market model. Enviromental goods include things like access to clean water, clean air, the survival of wildlife, and the general climate. Environmental goods are usually difficult fully privatize and subject to the problem known as the tragedy of the commons.

Destruction or overuse of environmental goods, like pollution and other kinds of environmental degradation, can represent a form of market failure because it imposes negative externalities. Environmental economists thus analyze the costs and benefits of specific economic policies that seek to correct such problems, which also involves running theoretical tests or studies on possible economic consequences of environmental degradation.

Environmental Economic Strategies

Environmental economists are concerned with identifying specific problems to be rectified, but there can be many approaches to solving the same environmental problem. If a state is trying to impose a transition to clean energy, for example, they have several options. The government can impose a forcible limit on carbon emissions, or it can adopt more incentive-based solutions, like placing quantity-based taxes on carbon emissions or offering tax credits to companies that adopt renewable power sources.

All of these strategies rely, to varying degrees, on state intervention in the market; therefore, the degree to which this is acceptable is an important political factor in determining environmental economic policy. This debate is also known as prescriptive (in which the government would manually control carbon emissions) versus market-based (where the government would set goals and place incentives but otherwise allow companies to meet those goals however they wanted.)

Environmental Economics Challenges

Because the nature and economic value of environmental goods often transcend national boundaries, environmental economics frequently requires a transnational approach. For example, an environmental economist could identify aquatic depopulation, resulting from overfishing, as a negative externality to be addressed. The United States could impose regulations on its own fishing industry, but the problem wouldn't be solved without similar action from many other nations that also engage in overfishing. The global character of such environmental issues has led to the rise of non-governmental organizations (NGO's) like the International Panel on Climate Change (IPCC), which organizes annual forums for heads of state to negotiate international environmental policies.

Another challenge relating to environmental economics is the degree to which its findings affect other industries. As explained earlier, environmental economics has a broad-based approach and affects several moving parts. More often than not, findings from environmental economists can result in controversy. Implementation of solutions proposed by environmental economists is equally difficult because of their complexity. The presence of multiple marketplaces for carbon credits is an example of the chaotic transnational implementation of ideas stemming from environmental economics. Fuel economy standards set by the Environmental Protection Agency (EPA) are another example of the balancing act required by policy proposals related to environmental economics.

In the U.S., policy proposals stemming from environmental economics tend to cause contentious political debate. Leaders rarely agree about the degree of externalized environmental costs, making it difficult to craft substantive environmental policies. The EPA uses environmental economists to conduct analysis related policy proposals. These proposals are then vetted and evaluated by legislative bodies. It oversees a National Center for Environmental Economics, which emphasizes market-based solutions like cap and trade policies for carbon emissions. Their priority policy issues are encouraging biofuel use, analyzing the costs of climate change, and addressing waste and pollution problems.

Example of Environmental Economics

A prominent contemporary example of the use of environmental economics is the cap and trade system. Companies purchase carbon offsets from developing countries or environmental organizations to make up for their carbon emissions. Another example is the use of a carbon tax to penalize industries that emit carbon.

Corporate average fuel economy (CAFE) regulations are another example of environmental economics at work. These regulations are prescriptive and specify the gallons per mile of gas for cars for car makers. They were introduced during the 1970s to promote fuel efficiency in an era of gas shortages.