ENV 536: Environmental Economics and Policy (Lecture 2)

Assist.Prof. Sasitorn Suwannathep, Ph.d.

School of Liberal Arts King Mongkut’s University of Technology Thonburi sasitorn suwannathep 1

Link between economic activity and nature

Nature Natural Resource Economics (a) Economy (b) Environmental Economics sasitorn suwannathep 2

The Economy and the Environment

  (a) represents raw materials flowing into production and consumption the nature plays its role as provider (b) shows the impact of economic activity on the quality of the natural environment the nature acts as a receiver. sasitorn suwannathep 3

Economics and the Environment

  Economic theory explains what we observe in reality, including environmental problems Recognize the link between economic activity and the environment using models   Circular Flow Model Materials Balance Model sasitorn suwannathep 4

Circular Flow Model

 Shows the real and monetary flows of economic activity through the output and factor markets   Forms the basis for modeling the relationship between economic activity and the environment But does not explicitly show the linkage between economic activity and the environment sasitorn suwannathep 5

Circular Flow Model of Economic Activity

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Materials Balance Model

 Places the circular flow within a larger schematic to show links between economic activity and the natural environment via two sets of flows   Flow of resources from the environment to the economy  The focus of

Natural Resource Economics

Flow of residuals from the economy to the environment  The focus of

Environmental Economics

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Materials Balance Model (Con’t)

 Residuals are pollution remaining in the environment after some process has occurred  Residuals can be delayed, but not prevented, through

recovery,

recycling, and

reuse

 Shown as inner flows in the model sasitorn suwannathep 8

Materials Balance Model: The Interdependence of Economic Activity and Nature

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Science and the Materials Balance Model

   The flow of resources and residuals are balanced according to laws of science First Law of Thermodynamics  Matter and energy can neither be created nor destroyed Second Law of Thermodynamics  Nature’s capacity to convert matter and energy is not without bound sasitorn suwannathep 10

Using Science to understand the Material Balance



First law of thermodynamics

: matter and energy can neither be created or destroy.

  This law can apply to the materials balance model in the long run, the flow of materials and energy drawn from the nature into consumption and production must equal the flow of residuals that run from these activities back into the environment.

M = R d p + R d c sasitorn suwannathep 11

Natural Environment Recycled (R r p ) Raw materials (M) Residuals (R p ) Producers Goods (G) Consumers Residuals (R c ) Discharged (R d p ) Discharged (R d c ) Recycled (R r p ) sasitorn suwannathep 12

Using Science to understand the Material Balance

  Because matter and energy cannot be destroyed, then the materials flow can go forever.

The second law of thermodynamics

not unlimited.

states that the nature’s capacity to convert matter and energy is Even recycling can delay the disposal of residuals, but it cannot be perfect, each cycle must lose some proportion of the recycled material. sasitorn suwannathep 13

Environment Management

R d p + R d c = M = G + R p – R r p – R r c  Three ways to reduce M  Reduce G (Goods and Services ￬ )  Reduce R p (Production Residuals ￬ )  Increase (R r p + R r c ) (Recycling ￪ ) sasitorn suwannathep 14

Fundamental Concepts in Environmental Economics

 Environmental economics is concerned with identifying and solving the problem of environmental damage , or pollution , associated with the flow of residuals.  Pollution >> The presence of matter or energy whose nature, location, or quantity has undesired effects on the environment.

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Fundamental Concepts in Environmental Economics

 Environmental damage critically on identifying: depends    the causes of damage the sources of damage the scope of the damage.

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Causes of Environmental Damage

Classifying by their origin  Natural pollutants  Contaminants that come about through nonartificial processes in nature.

 Volcanic eruptions  Salt spray from oceans etc.  Anthropogenic pollutants  Contaminants associated with human activity.

 Gas from combustion  Chemical wastes from production process etc.

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Sources of Environmental Damage

 Sources Grouped by

Mobility

 Stationary Source  A fixed-site producer of pollution (coal-burning power plants etc).

Mobile Source Any nonstationary polluting source (automobiles etc).

 Sources Grouped by

Identifiability

 Point Source Any single identifiable source from which pollutants are released.

 Nonpoint Source A source that cannot be identified accurately and degrades the environment in a diffuse, indirect way over a broad area.

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Scope of Environmental Damage

 Environmental pollution is often classified according to the relative size of its geographic impact as local, regional, or global.

 Local Pollution   Environmental damage that does not extend far from the polluting source.

Ex. Urban Smog, Solid Waste Pollution sasitorn suwannathep 19

Scope of Environmental Damage

 Regional Pollution   Degradation that extends well beyond the polluting source.

Ex. Acidic Deposition sasitorn suwannathep 20

source: http://science.howstuffworks.com/ acid-rain.htm/printable http :// maps .

grida .

no / go / graphic / graphicid / 28536B4F F03D-4D72-AF56-B6EF7211EB72 Acid Rain in Europe sasitorn suwannathep 21

Scope of Environmental Damage

 Global Pollution   Environmental effects that are widespread with global implications.

Ex. Global Warming , Ozone Depletion sasitorn suwannathep 22

Scope of Environmental Damage

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Source: www .

met .

sjsu .

edu / ~cordero/education/education.htm

Environmental Objectives

 The agenda setting is a political process.  Today, virtually every environmental decision is guided by what have become worldwide objectives :    environmental quality , sustainable development , and biodiversity . sasitorn suwannathep 24

Environmental Objectives (Con’t)

 Environmental Quality    A reduction in

anthropogenic contamination

a level that is ‘ acceptable ’ to society.

Some pollution is

controllable.

natural

and then

not

to The

absence of anthropogenic pollutants

could be achieved only if there were a

prohibition

on all goods and services that characterize modern living.

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Environmental Objectives (Con’t)

 Sustainable development   Management of the earth’s resources such that their long-term quality and abundance is ensured for future generations.

Achieving an appropriate

economic growth balance

between the

preservation of natural resources

is the essence of the sustainable development.

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From Stockholm to Rio

  In 1972 Stockholm had drawn attention to the role of development in protecting the environment . By 1992 there was a clear recognition of the inextricable link between environment and development but there was also a strident demand for appropriate ethics and principles of behavior to be clearly stated . It was rewarding to see, twenty years later, that the relevance of the spiritual and moral dimension was at last being so widely recognized on an international level . sasitorn suwannathep 27

Environmental Objectives (Con’t)

  The Earth Summit A more comprehensive environmental agenda was addressed at

the United Nations Conference on Environment and Development

(

UNCED

) held in Rio de Janeiro, Brazil, in 1992 and was attended by 6,000 delegates from more than 170 countries.

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Rio de Janeiro Declaration on Environment and Development

sasitorn suwannathep Source: www .

env .

go .

jp / en / wpaper/1993/eae220219000001.gif

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Environmental Objectives (Con’t)

 Biodiversity  The variety of distinct species, their genetic variability, and the variety of ecosystems they inhabit.

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sasitorn suwannathep Source: http :// www .

brazadv .

com / images / biodiversity .

bmp 31

Environmental Objectives (Con’t)

   The goals of environmental quality , sustainable development , and biodiversity set an ambitious agenda. All of society must work toward developing effective environmental policy initiatives. Central to this effort is

a planning process

in which public officials , industry , and private citizens participate .

This process involves a series of decisions about assessing environmental risk and responding to it.

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Environmental Policy Planning : An Overview

  Environmental policy planning interdependence of many segments of society, including government agencies involves the , private industry , the scientific community , and environmentalists . Each group of participants, albeit from a different vantage point, plays a significant role in formulating policy, and each offers expertise to outcome.

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Environmental Policy Planning : An Overview

 Policy Planning in the United States   The

Environmental Protection Agency (EPA)

acts as a sort of liaison between various constituents of each sector. EPA established in 1970 by President Nixon.

The

National Environmental Policy Act

(

NEPA

)   NEPA directs the integration of tasks across agencies, executive departments, and branches of government.

Environmental policy planning them biology , chemistry , relies on careful research and analysis, which in turn depends on individuals with expertise in many disciplines, among economics , law , and medicine .

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Parties Involved in Environmental Policy Planning

Private Sector

•Environmentalist •Private Industry •Scientists •Economists •Labour Unions •Private Citizens

Environmental Protection Agency Public Sector

• Executive Branch •Congress •Judiciary •FDA •Occupation Safety And Health Adm.

•Other Administrative Agencies •State and Local Gov’t 35 sasitorn suwannathep

Environmental Policy Planning : An Overview

 Policy Planning Process Tool  Risk Analysis  Risk Assessment  Risk Management sasitorn suwannathep 36

Environmental Policy Planning : An Overview

 Risk Analysis  Risk Assessment  The environmental problems are identified, and prioritized, which are done through scientific

assessment

of the relative

risk to human health and the ecology

of a given environmental hazard.

 The assessment must determine whether or not a

causal relationship

exists between the

identified hazard

and

any observed health or ecological effects

, if yes, then the scientists need to

quantify how the effects change

to the hazard.

with the increased exposure sasitorn suwannathep 37

Environmental Policy Planning : An Overview

 Risk Analysis  Risk Management    After risk assessment, the planning process enters to risk management. The decision-making process of evaluating and choosing from alternative responses to environmental risk.

The objective of risk management to choose a policy instrument that reduces the risk of harm to society.

 Normally, risk responses to various types of control instruments. sasitorn suwannathep 38

Environmental Policy Planning : An Overview

 Risk Analysis  Risk Management   Policy Evaluation Criteria: these criteria are based on measures of

risk, costs, or benefits

- either singularly or in comparison to one another.

  Allocative efficiency Requires that resources be appropriated such that the additional benefits to society are equal to the additional costs.

Cost-effectiveness Requires that the least amount of resources be used to achieve an objective. Efficiency and cost-effectiveness are rooted in resource allocation.

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Environmental Policy Planning : An Overview

 Risk Analysis  Risk Management 

An Environmental equity criteria: Environmental Justice

 Fairness of the environmental risk burden across segments of society or geographical regions.

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Environmental Policy Planning : An Overview

 Risk Analysis  Risk Management  Government’s Overall Policy Approach: 

Command-and-control approach : the Regulatory Approach

A policy that directly regulates polluters through the use of rules or standards.



Market approach: An incentive-based policy

A policy that e ncourages conservation practices or pollution reduction strategies.   A fee on pollutant release or tax levied on pollution generating commodities.

the “ polluter-pays principle ” , found that approximately 270 economic instruments were in use across these countries.

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sasitorn suwannathep http :// www .

ijc .

org / rel / boards / wqb / psfig3 .

gif 42



Environmental Policy Planning : An Overview

 Risk Analysis Risk Management  Setting the Time Horizon  Management strategies - This approach is to target policy at more immediate or short-term problems.

- Methods that address existing environmental problems and attempt to reduce the damage from the residual flow.

 Pollution prevention A long-term strategy aimed at reducing the amount or toxicity of residuals released to nature. sasitorn suwannathep 43

Next lecture will be on Nov 22, 2009 at Room LNG 604 School of Liberal Arts Building sasitorn suwannathep 44