Transcript Macroeconomic and International Environmental Management

Macroeconomics,
International Economics, &
Green Accounting
How can macroeconomic & int’l
policy affect the environment?
The income effect
Recall theory: Income is an argument of
demand
If consumption of a good:
Increases with increased Y, normal good
Decreases with increased Y, inferior good
Recall Environmental Kuznet’s curve
Pollution is first (+) correlated with income,
then (-) correlated.
Individual to societal demand
How translate individual demands into societal
demand and government policy?
Aggregate individual demands, translate into
government demand
Think of environmental quality as a public good
Level of provision depends on form of government.
Democracy more likely to provide public goods?
What is “supply of environmental quality”?
What is “demand for environmental quality”?
Demand and supply for
environmental quality
Demand: value to consumers
How consumers value (are willing to pay
for) things like clean air, clean water,
biodiversity, ecosystem services, (non)-use
values.
Supply: cost to provide
Richer economies have larger industrial
base, increasing MC of providing
environmental quality (not necessarily)
Interaction of supply and demand
Both supply and demand may shift
when incomes in a country increase.
$
S1
S0
Drawn this way,
environmental
quality increases
with increased Y.
D1
Q0 Q1
D0
Environmental Quality
But environmental quality may 
S1
$
S0
Q1 Q0
Drawn this way,
environmental
quality decreases
with  Y.
D0 D1
Environmental Quality
Safe water vs. income
% w/o
safe
water
Regression analysis on 86
Countries from around the world
Shows improvement in drinking
Water quality with  Y.
Income
Why are we studying this?
How to improve environmental quality in
poor countries?
Could focus international effort on protecting
resources, improving environment directly
If we believe Kuznet’s curve, could focus
attention on increasing incomes of poor
people, who will then demand increased
environmental quality.
Insufficient data to be certain about outcome.
Transboundary pollution
Pollution that migrates beyond
jurisdiction of source.
GHGs, SO2 (acid rain), water pollution,
some biodiversity loss, exotic species.
Possible policy instruments
Tariffs, standards for cleanliness,
international environmental agreements,
non-targeted international agreements.
Green national accounting
Measures of national income: GNP, GDP
Don’t account for environmental
degradation and resource depletion
Can give misleading measure of
national “well-being”, may lead to
wrong policy.
Many adjustments have been proposed
to “correct” standard measures.
“Natural capital” depreciation
Natural capital: the available endowment
of land and natural resources
Measure depletion of natural resources
(oil, timber, minerals, soils)
Subtract from standard measures
Result: many developing nations show
substantial effect
Indonesia example: “Adjusted
Net Domestic Product”
Pollution control & cleanup
How should pollution control and
cleanup costs be accounted for in
developed nations?
Should cleanup expenditures contribute
to GNP? Some think not.
Main issue: don’t double count. These
are legitimate expenditures in order to
maintain environmental values.
How are national accounts used?
Primary use: assist policy makers in
government.
E.g. Gov’t expenditures on scientific
research are linked to current economic
performance and climate.
United Nations has proposed a “System
of Environmental and Economic
Accounting”, some adjustments
underway.
Paying for public goods
Public goods will be under-provided,
externalities will not be internalized in
free market.
Government intervention: tax revenues
can pay for cleanup, regulation, public
goods provision
But many taxes “distortionary”
E.g. Income tax discourages work!
Costs $1.40 to raise $1 in revenue
Double dividend
If we substitute distortionary taxes with
pollution taxes, we may earn a “double
dividend”
Reduce pollution (and therefore damage
from pollution)
Reduce distortionary taxes on labor and
thus the DWL from those taxes
• This is called the “revenue recycling effect”
A 3rd effect of pollution taxes
“Tax interaction effect”
Polluting good and leisure are substitutes
Tax pollution, demand for leisure shifts out
If labor is still taxed, shift introduces an additional DWL
attributed to  pollution
Decreases social welfare.
Overall size of tax interaction effect varies among
polluting industries
Estimate: pollution tax should be set at 63% of
marginal damage.