ECONOMICS AND POLICY. Costa Rica. Economics and the environment 2/9/2015. This lecture will help you understand:

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1 This lecture will help you understand: ECONOMICS AND POLICY How economies exist within the environment and rely on ecosystem services Principles of classical and neoclassical economics Valuation of ecosystem services and full cost accounting Environmental policy and the role of science in policymaking History of U.S. environmental policy and laws Chapter 5 Central Case Study: Costa Rica values its ecosystem services In 1996, Costa Rican government began the PSA program (Payment for Environmental Services) Farmers and ranchers were paid to preserve forests Funds for the program were collected from people and companies that benefit from the ecosystem services the forests provide Costa Rica Forest cover rose from 17% in 1983 to 52% today Ecotourism brings in $2 billion each year Costa Rica places economic value on nature and understands the importance of sustainable development 2015 Pearson Education, Inc. Economics and the environment Economies receive inputs from the environment, process them, and discharge outputs into the environment Economy A social system that converts resources into: Goods: manufactured materials that are bought, and Services: work done for others as a form of business Economics Studies how people use resources to provide goods and services in the face of demand 2015 Pearson Education, Inc. 1

2 Frequently Asked Question Economics Doesn t environmental protection hurt the economy? People say protection threatens economic growth Environmental protection is actually good for the economy Economics studies how people use resources to provide goods and services in the face of demand Economy is a social system that converts resources into: Goods: manufactured materials that are bought, and Services: work done for others as a form of business Economic theory moved from invisible hand to supply and demand Adam Smith Believed that self-interested economic behavior could benefit society if laws were followed and markets were competitive Classical economics When people pursue economic self-interest in a competitive marketplace The market is guided by an invisible hand and Society benefits This idea is a pillar of free-market thought Neoclassical economics Examines the psychological factors that underlie consumer choices Market prices reflect consumer preference Supply vs. demand Conflict between buyers and sellers leads to. Production of the right quantities of a product Cost-benefit analysis: evaluating decisions Cost-benefit analysis Costs of a proposed action are compared to benefits that result from the action If benefits costs: pursue the action But not all costs and benefits can be easily identified, defined, or quantified It is easy to quantify the cost of pollution-reducing equipment or jobs created by an activity But hard to assess the effects of pollution on health Monetary benefits are overrepresented Analysis is biased in favor of economic development Biased against environmental protection Neoclassical economics has environmental consequences Capitalist market systems operate according to neoclassical economics Enormous material wealth has been created Assumptions of neoclassical economics contribute to environmental degradation: Resources are replaceable All costs and benefits are internal We should discount the future All growth is good 2

3 Assumption: resources are replaceable Economic models treat natural resources and human resources as substitutable and interchangeable Once used up, a replacement resource will be found Some resources can be replaced, but some cannot Nonrenewable resources (e.g., fossil fuels) can be depleted Renewable resources (e.g., forests) can also be used up Assumption: costs and benefits are internal Only the buyer and seller experience costs and benefits associated with exchanging goods or services Pricing ignores social, environmental, or economic costs of pollution and degradation External costs Affect people other than buyers or sellers Include health problems, resource depletion, property damage Ignoring external costs shifts the burden to the taxpayers Environmental policy addresses external costs People suffer from external costs Assumption: discount long-term effects People who do not participate in a transaction suffer from external costs (health problems, property and aesthetic damage, stress, lower real estate values) A future event has less value than a present one Future events are discounted Short-term costs and benefits are more important than long-term costs and benefits Present conditions are more important than future ones We ignore the long-term consequences of policy decisions Environmental problems unfold gradually Discounting causes us to downplay environmental impacts of pollution and resource degradation 2015 Pearson Education, Inc. Assumption: all growth is good How sustainable is economic growth? Economic growth is needed to keep jobs and social order It creates opportunities for poor to become wealthier Progress is measured by economic growth Endless growth cannot be sustained, because resources to support growth are ultimately limited Modern global economic growth is unprecedented Americans are in a frenzy of consumption Economic growth comes from: Increased inputs (labor, natural resources) Improvements in efficiency of production (technology, ideas, equipment) Uncontrolled economic growth is unsustainable Resources are finite or have limited rates of extraction Technological innovation can push back limits, but not forever 3

4 How sustainable is economic growth? Environmental economics Economies grow by increasing efficiency to attain sustainability within our current economic system Environmental economists developed methods to tackle the problem of external costs and discounting Ecological economics Societies cannot surpass environmental limitations Ecological economists advocate steady-state economies Economies that mirror natural ecological systems They neither grow nor shrink but stay stable Quality of life increases through technological advances We can assign monetary value to ecosystem goods and services The market often assigns natural resources no quantitative monetary value Nonmarket values Values not included in the price of a good or service Hard to quantify, since there is no traditional measure of economic worth Natural cycles are vital to our existence, but markets impose no penalties when we disturb them Valuing nature Surveys determine how much people are willing to pay to protect or restore a resource Measure the money, time, or effort expended to travel to parks for recreation Compare housing prices in different areas to infer the dollar value of landscapes, views, and peace and quiet Calculate the cost to restore natural systems, replace systems with technology, or clean up pollution The value of the world s ecosystem services We can measure progress with full cost accounting Earth s economic value of 17 ecosystem services each year equals $143 trillion in 2014 dollars More than the GDP of all nations combined Gross Domestic Product (GDP) The monetary value of final goods and services produced each year Has been used for decades to assess each nation s economy Fails to account for nonmarket values Includes desirable and undesirable activity GDP can rise as a result of crime, war, pollution, and natural disasters 2015 Pearson Education, Inc. 4

5 We can measure progress with full cost accounting (cont d) Genuine Progress Indicator (GPI) Indicators that distinguish between desirable and undesirable economic activity Conventional economic activity plus positive nonmonetary contributions such as volunteering and parenting Negative impacts such as crime and pollution are subtracted GPI can differ greatly from GDP Full cost accounting (true cost accounting) Accounts for all costs and benefits Example: Change in U.S. GDP vs. GPI across 50 years 2015 Pearson Education, Inc. Markets can fail Environmental policy Market failure occurs when markets ignore The environment s positive impacts on economies (ecosystem services) The negative effects of activities on the environment or people (external costs) Government intervention counters market failure through Laws and regulations Taxing harmful activities Designing economic incentives to promote fairness, conservation, and sustainability Once a society agrees that a problem exists, it may persuade its leaders to solve it through policy Policy A formal set of general plans and principles to address problems and guide decision making Public policy Policy made by governments at local, state, federal, or international level Environmental policy Pertains to human interactions with the environment Regulates resource use or reduces pollution to promote human welfare and protect resources Policy addresses environmental problems Science, ethics, and economics help formulate policy Science provides information and analysis Ethics and economics clarify how society can address problems Government interacts with citizens, organizations, and the private sector Environmental policy addresses issues of fairness and resource use Capitalist markets are driven by short-term profit Not long-term social or environmental stability Little incentive to minimize impacts Market failure justifies government intervention Reasons for governments to intervene in market Provide social services National defense, health care, education Provide safety nets For elderly, the poor, victims of natural disasters Eliminate unfair advantages held by single buyers/sellers Manage publicly held resources Minimize pollution and threats to health and quality of life 5

6 Environmental policy Environmental policy tries to: Protect people s health and well-being Safeguard environmental quality and conserve natural resources Promote equity or fairness in resource use Tragedy of the commons Publicly accessible resources become overused and degraded when unregulated Forests, fisheries, clean air, clean water, global climate Best prevented by restrictions of use and management Environmental policy addresses issues of fairness and resource use Free riders People are tempted to cheat and not participate in sacrificing to protect the environment An entity gets a free ride by avoiding sacrifices made by others Private voluntary efforts are less effective than public policies, where everyone sacrifices Environmental policies also promote fairness by dealing with external costs Policies ensure that parties do not use resources in ways that harm others The science behind the story Do Payments Help Preserve Forest? Costa Rica s program to pay for ecosystem services has received international praise and inspired other nations to implement similar policies Early studies credit the PSA program for saving forests The science behind the story Follow-up studies found that other factors influenced their ecosystem recovery Most PSA contracts were not near forests at greatest risk of clearance Most landowners applying for payments were not planning to clear forest Forest Law 7575 had banned forest clearing nationwide Costa Rica s deforestation reduction rates were due to Policies that encouraged forest cover (before PSA program) Creation of national parks, which caused a boom in ecotourism Costa Rica is modifying their payment program Aiming payments toward regions of greater environmental value Making it more accessible to low-income farmers Various factors can obstruct environmental policy Perception that environmental protection means economic sacrifice Environmental policies reflect long-term trends, but short-term interests are often viewed as more important Wealth and power often exert disproportionate influence over policymakers 6

7 Science informs policy but is sometimes disregarded A nation s strength depends on proper use of science Governments use some tax money to fund research Sometimes policymakers let ideology determine policy Politicians ignore scientists and mislead the public Government scientists have had their work censored, suppressed, or edited and their jobs threatened Unqualified people are put into powerful positions Scientifically literate citizens must ensure that our government uses proper use of science U.S. environmental law and policy The U.S. provides a good focus for understanding environmental policy It has pioneered innovative policies Its policies serve as models for other countries Understanding federal policy helps us understand it at local, state, and international levels Federal government s three branches shape policy Legislative, executive, and judicial The federal government s three branches shape policy Legislative branch (Congress) Congress passes legislation (laws) Executive branch (the president) Legislation is signed into law by the president Administrative agencies implement and enforce laws by creating regulations Specific rules to achieve objectives of a law Environmental policy agencies include EPA, Forest Service, FDA, Bureau of Land Management Judicial branch (Supreme Court and lower courts) Interpret laws and solve disputes of laws State and local governmental policies The structure of the federal government is mirrored at the state level State laws cannot violate principles of the U.S. Constitution If laws conflict, federal laws take precedence Cooperative federalism approach Federal agency sets national standards and works with state agencies to achieve them in each state Early U.S. environmental policy promoted development From 1780s to the late 1800s, laws promoted settlement and extraction of resources Early U.S. environmental policy promoted development General Land Ordinances of 1785 and 1787: encouraged people to move west The federal government managed unsettled lands Surveying and readying them for sale Settlement increased prosperity for citizens Relieved crowding in eastern cities But displaced millions of Native Americans People believed the land was infinite and inexhaustible 7

8 The second wave of U.S. policy encouraged conservation Public perception and government policy shifted Laws addressed problems caused by westward expansion and encouraged conservation Congress created Yellowstone National Park, the world s first national park, in 1872 Also, national parks, forests, and wildlife refuges Understood that the nation s resources are exhaustible and require protection Land management policies addressed soil conservation The 1964 Wilderness Act preserves pristine land The third wave responded to pollution In the 20th century, people were better off economically But lived with dirtier air, dirtier water, and more waste and toxic chemicals Events increased awareness of environmental problems and shifted public priorities and policies Rachel Carson s Silent Spring (1962) described the ecological and health effects of pesticides and chemicals The third wave responded to pollution Ohio s Cuyahoga River was so polluted that it caught fire in the 1950s and 1960s The public demanded more environmental protection Today, U.S. health is better protected and the air and water are cleaner mainly because of policies of the 1960s Major U.S. Environ mental Protecti on Laws ( ) Passage of NEPA and creation of the EPA were milestones National Environmental Policy Act (NEPA) 1970 Began the modern era of environmental policy Created the Council on Environmental Quality An Environmental Impact Statement (EIS) is required: For any federal action that might significantly impact the environment To assess the environmental impacts of any federally funded project An EIS usually does not halt projects Provides incentives to decrease damage Grants citizens input into the policy process EPA Environmental Protection Agency (EPA) 1970 Conducts and evaluates research Monitors environmental quality Sets and enforces standards for pollution levels Assists states in meeting standards and goals Educates the public 8

9 The social context for policy evolves In 1980s Congress strengthened, broadened, and elaborated upon laws of 1970s Then, political climate changed People began to feel that regulation often imposed economic burdens on businesses or individuals Ronald Regan and George W. Bush administrations began to roll back environmental policy Today in the United States Public health and environmental quality remain strong It is difficult to keep up with new chemicals being introduced by industry Energy demands are causing debates regarding oil exploration Environmental policy advances today on the international stage Other nations with innovative policies Germany Impressive strides with solar energy Sweden Progressive environmental policies Costa Rica and Bhutan Restoring natural capital China Renewable energy, reforestation, and pollution control Current environmental policies Sustainability, sustainable development, global climate change International environmental policy International environmental policy International law is vital to solving transboundary issues Globalization Process by which the world s societies have become more interconnected as a result of trade and communication technologies Facilitates spread of ideas and technologies that empower individuals and enhance our lives Environmental concerns related to globalization Organisms move from one continent to another increasing number of invasive species Climate change, ozone depletion, overfishing, biodiversity loss Customary law arising from long-standing practices or customs held by most cultures Conventional law arises from conventions and treaties United Nations Framework Convention on Climate Change (1994) Agreements to reduce greenhouse gas emissions that contribute to global climate change Kyoto Protocol Specified details of the emissions limits Major environmental treaties ratified by most of the world s nations International environmental policy North American Free Trade Agreement (NAFTA): U.S., Mexico, and Canada Eliminated trade barriers such as tariffs on imports and exports, making goods cheaper to buy 9

10 Several organizations shape international policy International organizations influence nations through: Funding, economic or political pressure, and media attention United Nations (UN): plays an active role in policy Sponsors conferences, coordinates treaties, publishes research The World Bank One of the largest funding sources for economic development in poor countries Funds dams, irrigation, infrastructure, etc. Funds unsustainable, environmentally damaging projects Several organizations shape international policy The World Trade Organization (WTO) Represents multinational corporations Promotes free trade Can impose penalties on nations that don t comply with its directives Interprets environmental laws as unfair barriers to trade Brazil and Venezuela filed a complaint against U.S. regulations requiring cleaner-burning fuel The WTO agreed with Brazil and Venezuela, despite threats to human health Several organizations shape international policy Nongovernmental organizations (NGOs): entities that influence international policy Some do not get politically involved Example: The Nature Conservancy Others try to shape policy through research, education, lobbying, or protest Example: Greenpeace, Conservation International, and Population Connection Weighing the Issues Trade Barriers and Environmental Protection If Canada has stricter laws for environmental protection than Mexico, and if these laws limit Mexico s ability to export its goods to Canada, then by WTO policy Canada s laws could be overruled in the name of free trade Do you think this is fair? Now consider that Canada is wealthier than Mexico and that Mexico could use an economic boost Does this affect how you would respond? Approaches to environmental policy Strategy: lawsuits in the courts Environmental policy has three major approaches: Lawsuits in courts Command-and-control Economic policy tools Before legislation, lawsuits addressed U.S. policy issues Individuals suffering from pollution sued polluters in court Courts make polluters stop or pay fines Industrialization and population growth made it harder to control pollution Also, judges were reluctant to hinder industry People saw legislation and regulation as more effective in protecting health and safety 10

11 Strategy: command-and-control Strategy: economic policy tools Command-and-control approach A regulating agency prohibits actions Sets rules, standards, or limits Threatens punishment for violators This is the approach used for most environmental laws and regulations enforced by agencies today This simple approach has worked well It brings cleaner air, water, safer workplaces, and healthier neighborhoods People don t like the top-down approaches that dictate particular solutions to problems Alternative approaches channel innovation and economic policies to benefit the public Promote desired, and discourage undesired, outcomes Encourage market competition to produce new solutions at lower cost Strategies include: Green taxes, subsidies, permit trading, and ecolabeling Green taxes discourage undesirable activities Governments use taxes to benefit the public Internalizing harmful external costs makes them part of the cost of doing business Green taxes Taxes environmentally harmful activities and products Businesses reimburse the public for damage they cause The more pollution, the higher the tax payment Companies have financial incentives to reduce pollution with freedom to decide how to do so Either invest in pollution control technology or Pay the tax, which the government can use to reduce pollution in some other way Green taxes Costa Rica uses green taxes to help fund the PSA program 3.5% tax on sales of fossil fuels The U.S. has similar taxes Sin taxes (e.g., on cigarettes and alcohol) are tools of U.S. social policy Green taxes Subsidies promote certain activities Polluter-pays principle: the party that pollutes is held responsible for covering the costs of its impacts Widely used in Europe Carbon taxes: controversial taxes on gasoline, coalbased electricity, and fossil-fuel-intensive products Used to fight climate change Subsidy: a government giveaway of money or resources to support/promote an industry or activity Tax break: helps an entity by relieving its tax burden Subsidies can promote sustainability, but they have been used to support unsustainable activities The U.S. subsidizes logging, grazing, and mining Benefits private parties while degrading publically held resources 11

12 Subsidies Ecolabeling empowers consumers From 1950 to 2010, U.S. government gave: $594 billion to oil, gas, and coal corporations And just $171 billion to renewable energy In 2009, President Obama and other leaders of Group of 20 (G-20) nations resolved to gradually phase out their collective $300 billion of annual fossil fuel subsidies However, they have actually grown, not shrunk Uses the marketplace to counteract market failures Ecolabeling: tells consumers which brands have been grown using sustainable practices Labeling recycled paper Organic foods Dolphin-safe tuna Sustainably harvested lumber 2015 Pearson Education, Inc. Emissions trading can produce cost-effective results Emissions trading: a government-created market in permits for an environmentally harmful activity Businesses buy, sell, or trade these permits Cap-and-trade emissions trading system The government sets pollution levels ( caps ) Permits let polluters emit some amount of pollution Polluters can exchange (sell) permits The government can set lower emission levels Companies have an economic incentive to reduce emissions Market incentives work at the local level Municipalities charge residents for waste disposal According to the amount of waste generated Cities tax disposal of costly items (tires, motor oil) Some cities give rebates for buying water-efficient appliances Power utilities give discounts to consumers buying efficient lightbulbs and appliances It is cheaper than expanding generating capacity Sustainable development Sustainable development is global Sustainable development Economic progress that maintains resources for the future Development that meets the needs of the present without sacrificing the ability of future generations to meet their own needs (United Nations definition) Triple bottom line of sustainable development Economic advancement Environmental protection Social equity Several conferences have been beneficial Earth Summit in Rio de Janeiro, Brazil 1992 led to: Convention on Biological Diversity Framework Convention on Climate Change 2002 World Summit on Sustainable Development Johannesburg, South Africa United Nations Millennium Declaration 2000 Millennium Development Goals for humanity 2015 Pearson Education, Inc. 12

13 Conclusion Environmental policy is a problem-solving tool It uses science, ethics, and economics Command-and-control legislation and regulations The most common approach Innovative economic policy tools are being deployed Environmental and ecological economists quantify the value of ecosystem services Sustainable development depends on economic, social, and environmental well-being and reinforcement to provide truly sustainable solutions Which of the following is a reason for a government to intervene in the marketplace? 1. To eliminate unfair advantages held by single buyers or sellers 2. To provide social services (e.g., education) 3. To provide safety nets (e.g., for the elderly) 4. To reduce pollution and resource depletion of the commons 5. All of these are good reasons for governments to intervene in the market Why do the fundamental assumptions of neoclassical economics lead to environmental damage? Which of the following statements would be spoken by an ecological economist? 1. It understands that resources are limited 2. It assumes that future events must be accounted for 3. It assumes that only individuals involved in a transaction bear the costs and benefits of an action 4. It internalizes externalities 1. The current economic system is working well 2. The current economic system simply needs to be finetuned 3. The current economic system is broken, and a new one needs to be developed 4. Economic systems never work 5. All of these are assumptions that damage the environment 5. Economic systems must continue to expand and grow What occurs when markets fail? If a company is accused of being a free rider, what has it done? 1. Markets do not account for the environment s positive contributions to the economy 2. Companies mislead the public into thinking the company is acting more sustainably than it is 3. Nonmarket values are fully valued economically 4. Markets promote equity among social classes 5. None of these; markets have gotten too big to fail 1. It has polluted a publicly owned forest 2. It failed to account for a river s pollution-filtering capacity 3. Politicians influenced the regulation of companies 4. A factory did not put in pollution control devices that all other factories did 5. The federal government granted land to a railroad company 13

14 2/9/2015 Which of the following is NOT a duty of the Environmental Protection Agency (EPA)? Which of the following entities promotes free trade, often leading to massive environmental damage? 1. Conduct and evaluate research 2. Monitor environmental quality 3. Set and enforce standards for pollution levels 4. Help states meet standards and goals 5. All of these are duties of the EPA 1. NGOs 2. The EU 3. The World Bank 4. The WTO 5. The UN s Environment Programme Should environmental decisions be subject to cost-benefit analyses? Since the Deepwater Horizon s massive oil spill in 2010, stricter regulations and a moratorium on deepwater drilling have been proposed. Is this a good thing? 1. Yes, that s the only way we can be sure we are making the best decisions 2. Yes, because economists make the most rational decisions 3. Yes, but more research needs to be done on giving value to environmental services 4. No, the environment is worth far more than its dollar value 5. I don t care; the economy is way more important than environmental protection 1. Yes, oil spills are so damaging, everything possible should be done to prevent another spill 2. Yes, if gasoline prices increase, that will give incentives to develop other sources of energy 3. Yes, but only if the oil companies get tax relief for their troubles 4. No, we must drill for oil as much as we can 5. I don t care, as long as the price of gas decreases According to this figure, what happens when the market reaches equilibrium? What major conclusion can be drawn from this graph on emissions trading of sulfur dioxide? 1. Supply will decrease 2. Demand will increase 3. The right amount of a good is produced 4. The quantity decreases 5. People run out of money 1. Cap-and-trade doesn t work 2. Cap-and-trade has worked 3. The U.S. no longer emits sulfur dioxide 4. Permitted levels have been lowered 5. It won t work for carbon dioxide emissions 14