Environmental economics a very short introduction

Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Stephen Smith 2011 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2011 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by Ashford Colour Press Ltd, Gosport, Hampshire ISBN 978–0–19–958358–4 10 Very Short Introductions available now: ADVERTISING • Winston Fletcher AFRICAN HISTORY • John Parker and Richard Rathbone AGNOSTICISM • Robin Le Poidevin AMERICAN POLITICAL PARTIES AND ELECTIONS • L Sandy Maisel THE AMERICAN PRESIDENCY • Charles O Jones ANARCHISM • Colin Ward ANCIENT EGYPT • Ian Shaw ANCIENT PHILOSOPHY • Julia Annas ANCIENT WARFARE • Harry Sidebottom ANGLICANISM • Mark Chapman THE ANGLO-SAXON AGE • John Blair ANIMAL RIGHTS • David DeGrazia ANTISEMITISM • Steven Beller THE APOCRYPHAL GOSPELS • Paul Foster ARCHAEOLOGY • Paul Bahn ARCHITECTURE • Andrew Ballantyne ARISTOCRACY • William Doyle ARISTOTLE • Jonathan Barnes ART HISTORY • Dana Arnold ART THEORY • Cynthia Freeland ATHEISM • Julian Baggini AUGUSTINE • Henry Chadwick AUTISM • Uta Frith BARTHES • Jonathan Culler BESTSELLERS • John Sutherland THE BIBLE • John Riches BIBLICAL ARCHEOLOGY • Eric H Cline BIOGRAPHY • Hermione Lee THE BOOK OF MORMON • Terryl Givens THE BRAIN • Michael O’Shea BRITISH POLITICS • Anthony Wright BUDDHA • Michael Carrithers BUDDHISM • Damien Keown BUDDHIST ETHICS • Damien Keown CAPITALISM • James Fulcher CATHOLICISM • Gerald O’Collins THE CELTS • Barry Cunliffe CHAOS • Leonard Smith CHOICE THEORY • Michael Allingham CHRISTIAN ART • Beth Williamson CHRISTIAN ETHICS • D Stephen Long CHRISTIANITY • Linda Woodhead CITIZENSHIP • Richard Bellamy CLASSICAL MYTHOLOGY • Helen Morales CLASSICS • Mary Beard and John Henderson CLAUSEWITZ • Michael Howard THE COLD WAR • Robert McMahon COMMUNISM • Leslie Holmes CONSCIOUSNESS • Susan Blackmore CONTEMPORARY ART • Julian Stallabrass CONTINENTAL PHILOSOPHY • Simon Critchley COSMOLOGY • Peter Coles THE CRUSADES • Christopher Tyerman CRYPTOGRAPHY • Fred Piper and Sean Murphy DADA AND SURREALISM • David Hopkins DARWIN • Jonathan Howard THE DEAD SEA SCROLLS • Timothy Lim DEMOCRACY • Bernard Crick DESCARTES • Tom Sorell DESERTS • Nick Middleton DESIGN • John Heskett DINOSAURS • David Norman DIPLOMACY • Joseph M Siracusa DOCUMENTARY FILM • Patricia Aufderheide DREAMING • J Allan Hobson DRUGS • Leslie Iversen DRUIDS • Barry Cunliffe THE EARTH • Martin Redfern ECONOMICS • Partha Dasgupta EGYPTIAN MYTH • Geraldine Pinch EIGHTEENTH-CENTURY BRITAIN • Paul Langford THE ELEMENTS • Philip Ball EMOTION • Dylan Evans EMPIRE • Stephen Howe ENGELS • Terrell Carver ENGLISH LITERATURE • Jonathan Bate EPIDEMIOLOGY • Roldolfo Saracci ETHICS • Simon Blackburn THE EUROPEAN UNION • John Pinder and Simon Usherwood EVOLUTION • Brian and Deborah Charlesworth EXISTENTIALISM • Thomas Flynn FASCISM • Kevin Passmore FASHION • Rebecca Arnold FEMINISM • Margaret Walters FILM MUSIC • Kathryn Kalinak THE FIRST WORLD WAR • Michael Howard FORENSIC PSYCHOLOGY • David Canter FORENSIC SCIENCE • Jim Fraser FOSSILS • Keith Thomson FOUCAULT • Gary Gutting FREE SPEECH • Nigel Warburton FREE WILL • Thomas Pink FRENCH LITERATURE • John D Lyons THE FRENCH REVOLUTION • William Doyle FREUD • Anthony Storr FUNDAMENTALISM • Malise Ruthven GALAXIES • John Gribbin GALILEO • Stillman Drake GAME THEORY • Ken Binmore GANDHI • Bhikhu Parekh GEOGRAPHY • John Matthews and David Herbert GEOPOLITICS • Klaus Dodds GERMAN LITERATURE • Nicholas Boyle GERMAN PHILOSOPHY • Andrew Bowie GLOBAL CATASTROPHES • Bill McGuire GLOBAL WARMING • Mark Maslin GLOBALIZATION • Manfred Steger THE GREAT DEPRESSION AND THE NEW DEAL • Eric Rauchway HABERMAS • James Gordon Finlayson HEGEL • Peter Singer HEIDEGGER • Michael Inwood HIEROGLYPHS • Penelope Wilson HINDUISM • Kim Knott HISTORY • John H Arnold THE HISTORY OF ASTRONOMY • Michael Hoskin THE HISTORY OF LIFE • Michael Benton THE HISTORY OF MEDICINE • William Bynum THE HISTORY OF TIME • Leofranc Holford-Strevens HIV/AIDS • Alan Whiteside HOBBES • Richard Tuck HUMAN EVOLUTION • Bernard Wood HUMAN RIGHTS • Andrew Clapham HUME • A J Ayer IDEOLOGY • Michael Freeden INDIAN PHILOSOPHY • Sue Hamilton INFORMATION • Luciano Floridi INNOVATION • Mark Dodgson and David Gann INTELLIGENCE • Ian J Deary INTERNATIONAL MIGRATION • Khalid Koser INTERNATIONAL RELATIONS • Paul Wilkinson ISLAM • Malise Ruthven ISLAMIC HISTORY • Adam Silverstein JOURNALISM • Ian Hargreaves JUDAISM • Norman Solomon JUNG • Anthony Stevens KABBALAH • Joseph Dan KAFKA • Ritchie Robertson KANT • Roger Scruton KEYNES • Robert Skidelsky KIERKEGAARD • Patrick Gardiner THE KORAN • Michael Cook LANDSCAPES AND CEOMORPHOLOGY • Andrew Goudie and Heather Viles LAW • Raymond Wacks THE LAWS OF THERMODYNAMICS • Peter Atkins LEADERSHIP • Keth Grint LINCOLN • Allen C Guelzo LINGUISTICS • Peter Matthews LITERARY THEORY • Jonathan Culler LOCKE • John Dunn LOGIC • Graham Priest MACHIAVELLI • Quentin Skinner MARTIN LUTHER • Scott H Hendrix THE MARQUIS DE SADE • John Phillips MARX • Peter Singer MATHEMATICS • Timothy Gowers THE MEANING OF LIFE • Terry Eagleton MEDICAL ETHICS • Tony Hope MEDIEVAL BRITAIN • John Gillingham and Ralph A Griffiths MEMORY • Jonathan K Foster MICHAEL FARADAY • Frank A J L James MODERN ART • David Cottington MODERN CHINA • Rana Mitter MODERN IRELAND • Senia Paseta MODERN JAPAN • Christopher Goto-Jones MODERNISM • Christopher Butler MOLECULES • Philip Ball MORMONISM • Richard Lyman Bushman MUSIC • Nicholas Cook MYTH • Robert A Segal NATIONALISM • Steven Grosby NELSON MANDELA • Elleke Boehmer NEOLIBERALISM • Manfred Steger and Ravi Roy THE NEW TESTAMENT • Luke Timothy Johnson THE NEW TESTAMENT AS LITERATURE • Kyle Keefer NEWTON • Robert Iliffe NIETZSCHE • Michael Tanner NINETEENTH-CENTURY BRITAIN • Christopher Harvie and H C G Matthew THE NORMAN CONQUEST • George Garnett NORTHERN IRELAND • Marc Mulholland NOTHING • Frank Close NUCLEAR WEAPONS • Joseph M Siracusa THE OLD TESTAMENT • Michael D Coogan PARTICLE PHYSICS • Frank Close PAUL • E P Sanders PENTECOSTALISM • William K Kay PHILOSOPHY • Edward Craig PHILOSOPHY OF LAW • Raymond Wacks PHILOSOPHY OF SCIENCE • Samir Okasha PHOTOGRAPHY • Steve Edwards PLANETS • David A Rothery PLATO • Julia Annas POLITICAL PHILOSOPHY • David Miller POLITICS • Kenneth Minogue POSTCOLONIALISM • Robert Young POSTMODERNISM • Christopher Butler that sign up to the agreement All countries experience the same process of global climate change, and the benefits of policy action cannot be restricted in any way to those countries that have shouldered the burden of carbon abatement This is an immense obstacle to achieving a broadly based international programme of coordinated policy action Even where pressure from concerned citizens and voters at home and diplomatic pressure from countries abroad encourages countries to sign up to an international agreement on climate change policy, the temptation of free-riding remains a problem Countries may sign but take little effective action, calculating that any penalties for breaking the terms of the agreement would be less than the saving in abatement costs, and probably largely unenforceable as well Realizing this, other countries may be tempted to free-ride too After all, the worst outcome for any country is to incur the costs of abatement, but find that so few other countries have done so that there are no benefits to be gained in return With these temptations, the coalition of countries taking action might prove unstable, and unable to persuade power generators and others to make the long-term financial commitments required for renewable energy, carbon capture and storage, and other expensive carbon-reducing investments Reaching a comprehensive global agreement is also complicated by the great differences between countries Some countries are much more vulnerable than others to climate change, especially low-lying countries which are at risk of sea level rise, and countries whose current climate provides high agricultural yields, which could be at risk if the climate becomes more unstable On the other hand, there are some countries which might even stand to benefit from modest climate change Carbon abatement costs vary across countries too, and any agreement should ideally ensure that carbon reductions take place where they can be made most cheaply In the Kyoto Protocol, this was reflected in various ‘flexibility mechanisms’, which were intended to allow countries to pay for carbon reductions elsewhere, where this would be less costly than their own abatement These have been controversial, partly because it is difficult to ensure that these mechanisms always achieve genuine emission reductions that would not otherwise happen But the most crucial difference between countries is in current emissions per head of population, with rich countries responsible for much higher carbon emissions, relative to their population size, than poorer countries On average, energy-related carbon dioxide emissions were tonnes per head of population across all countries in 2002, but three times this level (11.7 tonnes) in the industrialized member countries of the OECD, and barely half this level (2.2 tonnes per head) in developing countries Emissions in the USA, the world’s largest economy, exceeded 20 tonnes per head Given this variation in emissions levels, a central focus of controversy underlying the international negotiations on climate change has been how the burden of achieving a global cut in emissions should be shared between countries What target for emissions cuts should be given to countries with different levels of emissions per head – and different levels of income and living standards? One option – though clearly unrealistic – would be to ask for equal percentage cuts in emissions against the baseline of current emissions levels Then, if emissions were to be cut by half, for example, the abatement required of the USA per head of population would be almost ten times the abatement required in developing countries But it would also leave the USA with emissions ten times higher than developing countries, and would condemn developing countries to permanent energy-constrained underdevelopment Also, developing countries might observe that they were being asked to contribute to solving a problem that they had not created through their past emissions An alternative would be to agree that all countries would be awarded the same per capita carbon budget (say tonnes per head), which would permit some growth – and emissions growth – in developing countries, while concentrating nearly all abatement in the richest industrialized countries Perhaps this solution might seem fairer – though judgments about fairness in this situation seem particularly subjective However, by concentrating abatement actions in a relatively small group of countries it runs the risk that they will perceive the agreement to involve costs which exceed their own benefits Ultimately, countries only sign up to international agreements when it is in their interests to so, and an agreement which loads too much of the cost on one group of countries is almost certain to fail The obstacles to reaching a successful climate change agreement are real and substantial: both the temptation of free-riding and disagreement about burden-sharing pose major challenges Despite the large measure of scientific agreement about the growing risks of climate change – as reflected in the increasingly urgent tone of the reports from the Intergovernmental Panel on Climate Change – the 2009 summit in Copenhagen which was intended to agree a successor to the Kyoto Protocol failed to reach any meaningful deal on coordinated action Environmental economics cannot sidestep the negotiating realities – any more than the extensive scientific evidence has done But it can provide evidence that the scientific case for action is matched by a convincing economic case that the long-run benefits of action will be greater than the costs of carbon abatement Equally importantly, it has helped to show how policy instruments such as emissions trading and taxation can provide the market signals that will be needed to steer the global economy towards a low-carbon future References and further reading General recommendations Oxford Review of Economic Policy, issues 14(4) Environmental Policy (1998); 19(3) Controlling Global Warming (2003); 24(2) Climate Change (2008) There are many good academic textbooks on environmental economics As a follow-up to this introduction, I suggest Tom Tietenberg and Lynne Lewis, Environmental and Natural Resource Economics, 8th edn (Pearson Addison-Wesley, 2009) This also provides a good introduction to the economics of depletable and renewable natural resources Chapter 2: The economic theory of efficient pollution control Dieter Helm (ed.), Economic Policy Towards the Environment (Blackwell, 1991) The seminal paper on Coasean bargaining is R Coase, ‘The Problem of Social Cost’, Journal of Law and Economics, (1960): 1–44 The discussion of acid rain policies in Europe draws heavily on David M Newbery, ‘Acid Rain’, Economic Policy, 11 (October 1990) On the economics of international environmental policy agreements: Scott Barrett, Environment and Statecraft (Oxford University Press, 2003) Chapter 3: Environmental policy: instrument choice European Environment Agency, ‘Using the Market for Cost-Effective Environmental Policy, Market-Based Instruments in Europe’, EEA Report No 1/2006 (Copenhagen: EEA, 2006) Paul R Portney and Robert N Stavins (eds.), Public Policies for Environmental Protection, 2nd edn (Washington, DC: Resources for the Future, RFF Press, 2000) Winston Harrington, Richard D Morgenstern, and Thomas Sterner (eds.), Choosing Environmental Policy: Comparing Instruments and Outcomes in the United States and Europe (Washington, DC: Resources for the Future, RFF Press, 2004) A Denny Ellerman, Frank Convery, and Christian de Perthuis, Pricing Carbon: The European Union Emissions Trading Scheme (Cambridge University Press, 2010) The account of the US Acid Rain Program draws heavily on A Denny Ellerman, Richard Schmalensee, Elizabeth M Bailey, Paul L Joskow, and Juan-Pablo Montero, Markets for Clean Air: The US Acid Rain Program (Cambridge University Press, 2000) Chapter 4: Economic information and values in environmental policy decisions David Pearce, Anil Markandya, and Edward Barbier, Blueprint for a Green Economy (London: Earthscan, 1989), Chapter 3: ‘Valuing the Environment’; Chapter 6: ‘Discounting the Future’ David Pearce, ‘Cost–Benefit Analysis and Environmental Policy’, in Dieter Helm (ed.), Environmental Policy: Objectives, Instruments and Implementation (Oxford University Press, 2000) Symposium on Contingent Valuation, Journal of Economic Perspectives, 8(4) (1994): 3– 64 Richard C Porter, The Economics of Waste (Washington, DC: Resources for the Future, RFF Press, 2002) The hedonic pricing study of landfill disamenity discussed is Cambridge Econometrics, A Study to Estimate the Disamenity Costs of Landfill in Great Britain: Final Report (Defra Publications, 2003) The contingent valuation study of elephant conservation discussed is R Bandara and C Tisdell, “The net benefit of saving the Asian elephant: a policy and contingent valuation study”, Ecological Economics, 48 (2004): 93–107 Chapter 5: The economics of climate change Dieter Helm (ed.), Climate-Change Policy (Oxford University Press, 2005) Nicholas Stern, The Economics of Climate Change: The Stern Review (Cambridge University Press, 2007) Mark Maslin, Global Warming: A Very Short Introduction, 2nd edn (Oxford University Press, 2009) William Nordhaus, A Question of Balance: Weighing the Options on Global Warming Policies (Yale University Press, 2008) Index A acid rain 1, 28–37, 40, 52, 64–9, 124 Acid Rain Program (US) 44, 54, 59, 62–9, 120, 122 air quality 7, 88 assignment of rights 25–6 auctioning of emissions trading allowances 62–4, 116–17, 121 B banking of emissions trading allowances 58, 64, 66 bargaining: between nations see international negotiation between polluters and victims 25–7, 128 obstacles to efficient outcomes 27 biodiversity 71, 77 business-as-usual 55, 62, 109, 112 C carbon capture and storage (CCS) 97, 103–4, 126 carbon dioxide (CO2) 39, 54, 62–3, 82, 94–128 carbon footprint 23, 112–14 carbon price 115–122 carbon tax 44, 53–4, 62, 115–18, 121–2 Carson, Rachel, author of Silent Spring (1962) Clean Air Act (1956, UK) climate change 35, 54, 62, 82, 93–128 and GHG concentrations 94–5 costs 105–12 dynamics 96–8 policies 111–128 uncertainty 95–6, 98–9 Coase theorem 25–7 Coase, Ronald 25 command and control regulation 39, 40–3, 46, 50, 114–16 forms 40–1 limitations 39–40, 43–50, 114–16 compensating wage differential 85 contingent valuation 85–92 Convery, Frank 38 cost savings 22, 39–40, 45–50, 66, 115, 118 cost-benefit analysis (CBA) 70–7, 85, 100 equity weighting 75–7, 110 costs: marginal versus average 17, 22 pollution abatement 16–22, 29–31, 102–6 pollution damage 9, 16–17, 21, 31, 106–12 D damages 86 discount rate 100–2 discounting 100–102, 111–12 distribution of costs and benefits 22–24, 107, 110 double dividend 53–4 Dupuit, Jules 71 E Earth Summit (Rio) 93 econometric techniques 81 economic benefits of environmental policy 14–15 eco-tax see environmental tax efficiency and flexibility 65 elephants, value of conservation 88–9 Ellerman, Denny 67 emissions trading: comparison with emissions tax 55, 57–8 practical experience 44, 54, 58–9, 64–9, 118–20 price determination 55–7, 66–9 theory 54–64 transaction costs 58–60 energy efficiency 122–4 enforcement 41 Environmental Protection Agency (EPA) 4, 40, 65, 67 environmental regulation see command and control regulation environmental tax 38, 44, 50–5, 57–8, 60–2, 115–18 on measured emissions 44, 50–3 on products 38, 44, 51–3 environmental value estimation see valuation methods types 77–8 EU Emissions Trading Scheme (EU ETS) 44, 54, 59, 118–20 European Community see European Union European Union (EU) 40, 44, 54, 115, 118–20 existence value 78, 86 externalities 11–13 Exxon Valdez oil spill 86–7 F fairness 25–7 flue gas desulphurisation (FGD) 30, 40 forecasts: allowance prices 67 climate change 95, 99 Fox River emissions trading 44, 59 future generations, impact of climate change 99–102 G global warming 94–6 grandfathering of emissions trading allowances 62–3 green behaviour 39, 113–14 green tax reform 53 greenhouse gases 93–8, 102–12, 124 H health 4, 7, 12, 15–16, 23, 70, 77, 84, 86 hedonic pricing 78–85 housing market, environmental influences 78–84 human life, statistical value 83–5 hypothetical questions 92 I information and market failure 11, 123 information as limit to efficient regulation 48–9 innovation in abatement technology 45, 50, 67, 122 instrument choice 38–69, 113–24 Intergovernmental Panel on Climate Change (IPCC) 93–4, 128 international competitiveness 121 international negotiation 30–7, 124–8 K Kyoto Protocol 93, 118, 125–8 L landfill sites, disamenity 82–4 landfill tax 44, 53, 82–4 landscape 74–5, 86 litigation 86 lobbying, by industry 63, 66, 115, 121 London, smog (1952) 3–7 M MAC schedule see marginal abatement cost majority voting 75 Mäler, Karl-Göran 35–6 marginal abatement cost 16–22, 31, 102–106 marginal environmental damage 16–22, 30–1 market failure 9–13 market mechanisms examples 44 incentive effect 39, 42–3, 66–7, 115–18 limitations 121–2 market power 11, 59–60 market prices 10–11, 72, 79–80 market research 92 markets for pollution see emissions trading MED schedule see marginal environmental damage money as measure of value 16, 72 motor fuel 39, 44, 51, 71, 94, 117 N nitrogen oxides 28–9, 44, 50, 52 non-price instruments 40–1, 122–4 non-use value 78 Nordhaus, William 102, 109, 111–12 NOx charge (Sweden) 44, 52 nuclear power 103–5, 116 O occupational risk 85 open-ended questions 89–91 opportunity cost 19, 42, 72, 120 optimal pollution control 15–19, 21–2, 102 option value 77 P Pearce, David 109 Pigou, A C 18 plastic bag tax (Ireland) 38–40, 44 political influences on environmental policy 28, 54, 58, 84 power stations 2, 6, 28, 30–1, 40, 44, 64–8, 103, 116 pricing carbon 113–122 public goods 11 public revenues 53, 63 R recreation 77–8 recycling 2, 47, 52, 72, 82, 86 resource allocation and markets 10 revealed preferences 92 road construction 74 S safety valves in emissions trading 68 sample size 91 Sandmo, Agnar 51, 53 social cost of carbon 109 social justice 22–5, 76 static efficiency 45, 57 Stern Review 94–5, 99, 102, 109–12 sulphur dioxide (SO2) 28, 30, 33–4, 39, 44, 64–8, 120 survey design 86–91 T Tietenberg, Tom H 46 tradeable permits see emissions trading U uncertainty and climate change 98–9, 110 uncertainty and instrument choice 60–2, 69 use value 77–8 V valuation methods 78–92 value 15–16, 19, 72–8 victims of pollution 23, 25–7, 37 W warm glow motivations 91 wild animals 78, 85–6, 88–9 willingness-to-pay (WTP) 76, 80, 85–92 ... offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered... Chapman THE ANGLO-SAXON AGE • John Blair ANIMAL RIGHTS • David DeGrazia ANTISEMITISM • Steven Beller THE APOCRYPHAL GOSPELS • Paul Foster ARCHAEOLOGY • Paul Bahn ARCHITECTURE • Andrew Ballantyne... L Sandy Maisel THE AMERICAN PRESIDENCY • Charles O Jones ANARCHISM • Colin Ward ANCIENT EGYPT • Ian Shaw ANCIENT PHILOSOPHY • Julia Annas ANCIENT WARFARE • Harry Sidebottom ANGLICANISM • Mark