Environmental Economics Issues

Readers Question: Is it possible to construct the economic system so that does not rely upon expanded growth which as we all know, is damaging the environment? causing pollution e.t.c.

Could we have a society without economic growth? or as economists might prefer to answer – Can we have environmentally sustainable economic growth?

To promote an economic system without economic growth isn’t necessary. It is possible to have economic growth (increased output and living standards) whilst at the same time improving the environment we live in. But, this requires a much more conscious decision to place the environment as a primary economic objective. If you leave economic growth to the free market, inevitably we will see economic growth leading to environmental problems.

One of the great challenges of modern economics is to protect the environment. Part of the motivation is a simple moral case for being good guardians of the earth. But (fortunately for economics) there is a strong case of intrinsic self-interest. Protecting the environment nearly always makes good economic sense – as long as we look at issues in the long-term and not just from a short term / selfish perspective.

The environmental costs of economic growth

Rapid economic growth combined with a rapid population growth has placed great stress on the environment. If we are not careful – damage to the environment will threaten future living standards. For example:

• Air / land / water pollution causes health problems and can damage the productivity of land and seas.
• Global warming leads to rising sea levels, volatile weather patterns and could cause significant economic costs
• Deforestation damages soil and makes areas more prone to draught.
• Economic growth leads to resource depletion and loss of biodiversity
• Creation of waste and toxins.

What economic system could help promote environment?

If we leave it to a free market, consumers and firms will ignore the external costs of their actions and we will get overconsumption, environmental costs – and a decline in economic welfare.

We need to put a monetary value on the cost of pollution / environmental damage and make sure that is reflected in the price people pay (e.g. tax on negative externalities). This will mean the cost of burning fossil fuels will increase – reducing demand. The biggest problem is making sure that we actually include all environmental costs in the price of goods and services we use.

For example, if burning fossil fuels is causing global warming and sea levels to rise. The effect could be devastating to future generations. In this situation, we are underestimating the external cost of this pollution. We are not paying the full social cost, and in the long-term we are failing to correctly price goods.

The long term view

A difficulty is that we are used to pricing the cost of a good in terms of present value. Many environmental problems are cumulative and the costs are to future generations and people elsewhere in the world. Because we ignore these future costs, we are underestimating the potential social cost of current actions.

Another difficulty in calculating future costs is that we don’t know for certain. There is an element of uncertainty. This means we have to deal with probabilities. However, if we are dealing with the environment, there is a good case for being risk averse and not gambling on the hope that global warming will be less damaging than some scientists predict. Reducing CO2 emissions can be done with only marginal cost to current consumers. But, damaging the environment in the long-term could lead to a devastating high cost to future consumers.

Positive technology

On the other hand, we need to encourage the production and consumption of technologies which don’t damage the environment.

To give a simplistic example – we could increase tax on petrol (which causes pollution). Then use this tax revenue to subsidise solar powered/electric cars which don’t pollute.

This will ensure that our society seeks to reduce the consumption of goods which are damaging to the environment. We can enjoy the same level of transport, but it will be supported by a different energy source which doesn’t damage environment.