Environmental Economics and Sustainability: How do you get Wall Street to hug a tree?

Environmental Economics and
Sustainability
How do you get Wall Street to hug a tree?
John C. Whitehead
Department of Economics
Appalachian State University
Boone, NC


Outline
•
•
•
•

Environmental Economics
Market Failure
Sustainability
Environmental Policy



Environmental Economics
• Environmental economics is a subfield of
economics concerned with environmental issues
(other usages of the term are not uncommon). In
using standard methods of economics, it is
distinguished from green economics which
subsumes the nonstandard approaches to
environmental problems, environmental
science/environmental studies, or ecology.

• Source: Wikipedia


Crucial Question
• True or False:

The optimal amount of
pollution is zero.


Optimal Pollution

$
MAC

MD

Pollution


Market Failure
• Problems
– Negative externality
– Public goods

• Tools of environmental economists
– Benefit-cost analysis
– Cost effectiveness analysis

Negative Externality
• A market process
generates negative
spillovers.
• Example: pollution
• Solution: government
involvement that
reduces pollution to
the optimal level


Public Goods
• Non-rival
• Nonexcludable
• e.g., air,
water, climate


Benefit-Cost Analysis


Cost-effectiveness analysis
• Determination of the lowest cost
environmental policy that can achieve the
optimal pollution
• Minimizing costs = maximize profits
• Or: minimize costs → optimal pollution
level is lower

$
MAC
MD

Pollution


Environmental Policy
•
•
•
•

Free Market Environmentalism
Moral Suasion
Command and Control
Economic Incentives


Free Market Environmentalism
• Why is my yard free of trash while the
Blue Ridge Parkway is littered?
• Coase Theorem
• But: can’t privatize public goods like air,
water, climate


Moral Suasion
• “Give a hoot, don’t pollute”
• The native american’s tear

• Voluntary carbon reductions …
– Through public-private partnerships, the
President is working with businesses to
encourage voluntary, cost-effective
greenhouse gas emission reductions.
Source: www.whitehouse.gov


$

Command and Control
MAC
MD

Pollution


Economic Incentives
• Abatement subsidies
• Emissions taxes (e.g., carbon tax)
• Tradeable emissions permits (i.e., capand-trade)
• All three can produce the optimal pollution,
are least-cost and provide incentives for
dynamic efficiency


Pros and Cons
• Abatement subsidies:
– Will increase profits
– Profit motive might lead to an increase in the

number of polluting firms
– Might lead to an overall increase in pollution!


Pros and Cons
• Emissions taxes
– Double-dividend: tax generates revenue (that
can be used to reduce the budget deficit or
reduce distortionary taxes)
– Tax revenue = lost profits
– Big-time


Pros and Cons
• Cap-and-trade
– If permits are freely allocated there are no lost
profits
– Tradeable permits might lead to additional
profits (but overall less than if not regulated)
– Politically feasible …


The Grand Experiment


Five cap-and-trade bills in
Congress; Zero carbon tax bills
• [Red Cavaney, president and CEO of the
American Petroleum Institute] expressed no
preference for any of several potential

congressional actions to limit greenhouse-gas
emissions. But he also said he doubted a carbon
tax would be imposed any time soon. “Most
economists…say a carbon tax would be the
most efficient way to maximize reductions,” he
said. “But…if you talk to political advisors, that’s
the last vote they’ll take.”


Sustainability
• Sustainability is an attempt to provide the best
outcomes for the human and natural
environments both now and into the indefinite
future. … the Brundtland Commission, …
defined sustainable development as
development that "meets the needs of the
present without compromising the ability of
future generations to meet their own needs".
• Source: Wikipedia


Alternative definition
• Sustainability is achieved with correction
of environmental market failures.
• Optimal pollution
• Cost-effective policies