Environmental economics

Environmental economics refers to the application of economics to environmental issues. It is usually carried out within the framework of mainstream neoclassical economics.

Central to environmental economics is the concept of an externality. This means that some effects of an activity are not taken into account when it is priced. Too much pollution may occur if the producer need not take the interests of those adversely affected by the pollution into account. Too little nature conservation may occur if those who undertake such activities are not rewarded in relation to the increase in the quality of life for the general population they help to bring about. In economic terminology, these are examples of market failures, and that is an outcome which is not efficient in an economic sense.

Solutions advocated to correct such externalities include:

• Better defined property rights. For example, if people living near a factory had a right not to be polluted, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if government itself did not act (an early example of bioregional democracy).

• Taxes and tariffs on pollution. The tax should be such that pollution occurs only if the benefits to society (e.g. in form of greater production) exceeds the costs.

• Quotas on pollution. Often it is advocated that quotas should be implemented by way of tradeable emissions permits, which if freely traded may ensure that reductions in pollution are achieved at least cost. Henry Ford in the 1920s advocated a strict feedback solution whereby industry could take as much water as they wanted and use it for whatever they wanted, but had to put their "out-pipe upstream from their in-pipe" - thus suffering the consequences of any failures to filter the water.

Alternative approaches to environmental economics

Another way externality applies is when globalization permits one player in a market who is unconcerned with biodiversity to undercut prices of another who is - creating a "race to the bottom" in regulations and conservation. This in turn may cause loss of natural capital with consequent erosion, water purity problems, diseases, desertification, and another outcome which is not efficient in an economic sense. This concern led to the subfield of sustainable development and its political relation, the anti-globalization movement.

The above are advocated by the specific theory of Natural Capitalism (Hawken, Lovins, Lovins) which does not include:

• Trusts whose borders mimic the commons - granted favorable tax status in direct proportion to the amount of biodiversity that they preserve - this is explored in detail in environmental finance, which is less concerned with an efficient economy than with minimizing impacts of humans on nature - somewhat like the original U.S. conservation movement.

Environmental economics was once distinct from resource economics but is now hard to distinguish as a separate field as the two became associated with sustainable development and more radical green economists split off to work on an alternate political economy.

Environmental economics was a major influence on the theories of natural capitalism and environmental finance, which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the value of biodiversity to humans, respectively.

The more radical Green economists reject neoclassical economics in favour of a new political economy beyond capitalism or communism that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology" - Mike Nickerson.

These more radical approaches would imply changes to money supply and likely also a bioregional democracy so that political and economic and ecological "environmental limits" were all aligned, and not subject to the arbitrage normally possible under capitalism.

Accordingly, there is still a need for a more conservative environmental economics, and its subfields environmental finance, Natural Capitalism, measuring well-being and sustainable development.

See also

• biofuel, energy balance, environmental economic incentives, fair trade, risk assessment.