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

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

Environmental Economics and

Sustainability

How do you get Wall Street to hug a tree?

John C WhiteheadDepartment of EconomicsAppalachian State University

Boone, NC

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

MD MAC

Pollution

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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

MD MAC

Pollution

$

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

MD MAC

Pollution

$

Economic Incentives

• Abatement subsidies

• Emissions taxes (e.g., carbon tax)

• Tradeable emissions permits (i.e.,

cap-and-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 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