By encouraging society to view the supply of resources as infinite For this reason, many economists believe in perpetual growth of the economy and believe that a ballooning population is not a problem because more people create more opportunities. "Growth is good" is their nostrum.
In the mid-1950s, M. King Hubbert, a U.S. petroleum geologist, correctly predicted that a peak and subsequent drop in production of petroleum would occur around 1970 for the U.S. and in the first decade of the 21st century for the world (Hubbert, 1956). These predictions were confirmed recently (Hakes, 2000) and are illustrated in Figure 23, below.
In the case of petroleum, it is unlikely that growth rates of utilization will remain constant since both population and economical growth overbalance any potential increases in efficiency. For example, China, India, and Latin America are rapidly expanding their numbers of personal motor vehicles (PMVs) thus adding to the growing global rate of petroleum consumption. In China alone, production of passenger cars between 2000 and 2004 jumped from 605,000 to 2.33 million (which corresponds to a ~27% annual rate of increase!). In early 2005, the China Federation of Machinery Industry, forecast a 20% growth for 2005 to a level that would move China past Germany into third place globally for motor vehicle production. Most industry analysts believe that the industry will continue to expand in the 15% range annually for years to come. Assuming a "moderate" 15% growth in the Chinese automobile industry, it would take approximately 30 years for China to produce a fleet of 300 million MPVs on its roads (Figure 24). Assuming that each car consumes 25-30 miles per gallon and travels 10,000 miles each year, the overall gasoline need for this fleet of 300 million Chinese MVPs will be 2.4-2.9 billion barrels per year. Since the present use of gasoline in the U.S. is already 3.3 billion barrels per year and is predicted to reach ~6.6-7.0 billion barrels per year in 30 years time, it is easy to see that there will be a strong competition for petroleum products in the next few decades, especially since these calculations do not consider India's and Latin America's needs to accommodate their own growth. Granted, this simple projection ignores potential processes that may alleviate petroleum demand, such as increased vehicle efficiency and factor substitution (i.e. increased utilization of alternative fuels or electricity). However, it similarly disregards negative impacts on demand from increases in the amount of time each car spends idling in traffic due to increased vehicular congestion.
In any event, a "no growth" curve for fossil fuel utilization appears unlikely. Instead, we seem bound to face an accelerated depletion of petroleum and natural gas reserves leading to the realization that fossil fuel resources, on which our economies are so dependent, are not infinite. Of course, before this full depletion occurs, market forces (i.e. prices) will prevent the curves to crash through reductions in resource utilization (modification of behavior of individuals) and the development of alternative solutions (alternative fuels, alternative vehicular technologies, increased efficiencies, etc). Return to the top of the Page 3.3 Externalities Although the mathematical models above allow us to understand relatively well the state of fossil fuel resources and permit to forecast fluctuations in pricing (through supply and demand analysis), this analysis ignores any factors external to the use and fate of the resources. For example, increased demand and use of petroleum over the next decades would lead to increased emissions of greenhouse gases to the atmosphere, forcing global warming effects (i.e. temperature increases, increases or decreases in regional hydrological cycles, sea level rise, etc) as well as direct and indirect pollution releases (oil spills, production of volatile organic compounds leading to ozone formation in urban areas, fine particulate matter emissions leading to human health impacts). Hence, the modeling of petroleum use based exclusively on its finite availability (supply) and desirability (demand) by society leaves aside long term issues that affect economical outcomes. For examples, as the climate shifts to a warmer mode, some areas may experience warmer, dryer conditions that will generate heat and water strains on populations and ecosystems. As people adjust to these new conditions (assuming that they have the economical and technological power to do so), they will probably increase their demand for energy to "climatize" living areas as well as extract and treat water from more distant places. A higher demand for energy, in turn, stresses even more the finite resources leading to increased prices. Additionally, the process of fossil fuel extraction is far from being "clean". Diverse releases (oil spills, gas and combustion by-products, acid mine drainage) lead to a degradation of the environment, which requires energy and human technology to mitigate and correct. The true cost of petroleum usage for example (i.e. health care, environmental clean up) is not incorporated into an ideal market equilibrium model describing the fluctuations of prices based on declining petroleum reserves and increasing demands. For instance, the proportion of emissions of different atmospheric pollutants coming from the four major energy-consuming sectors in the U.S. (Figure 25), show the potential impact of transport on human health. Indeed, this sector acts as a major source of volatile organic compounds (VOCs) and coarse and fine particulate matter (PM10 and PM2.5, respectively), which themselves are responsible for ozone formation and poor air quality in urban systems. Decreasing air quality leads both to long-term increases in health care (i.e. increased incidence of asthma and impact on fetal development) as well as decreased property values. A corollary to this statement, which is now shown by economic modeling, is that people are now willing to pay for environmental amenities such as clean air. The isolation of human economical structures from environmental ecosystems and impacts thus appears limited in the face of present understanding of the connections across natural and human ecosystems. Figure 25. U.S. 1998 energy-linked emissions as percentage of total emissions. (Source: Dept. of Energy). Return to the top of the Page 3.3.1 Market structure with externalities In economics, and externality is a cost or benefit resulting from an economic transaction that is borne or received by parties not directly involved in the transaction. Such externalities can be either positive or negative. Although positive externalities occur (i.e. the beneficial effect of education or immunization on society's overall welfare), an externality is often negative, particularly when dealing with natural resources and the environment. Externalities arise when:
Some externalities can be easy to deal with when they can be reduced or eliminated without much or any impact to the economic agent causing them. In many cases, however, externalities have long terms implications that are difficult to resolve. Additionally, externalities can either be static or dynamic as is illustrated in the relationship between two fishers operating under an open access property right regime. A static externality would result from the overexploitation of the fisheries from one of the fishers. This type of externality becomes dynamic when the offending agent, extracts resources that would develop a value in the future (juvenile species, species that has yet to develop a market) or by affecting the structure of the environment and reducing the capacity of the fisheries (i.e. destroying nursing grounds, releasing exotic species, etc). In the case of negative externalities, we expect to observe a difference between social and private benefits and social and private costs. Under these considerations, resource allocation through a market mechanism – i.e. one that is based solely on considerations of private costs and benefits – would be inefficient when viewed from the perspective of society at large (constituting a clear case of market failure). To illustrate this issue, let's consider the potential impact of agricultural production in a drainage basin on fisheries (this will example will be used further on during our exploration of coastal hypoxia). Assuming that our demand for a particular agricultural product (i.e. corn) is defined by the curve D in Figure 26, and that this curve represents the also represents both the marginal private and social benefits (D = MPB = MSB). The marginal private cost of producing corn (MPC; the supply curve) represents the agricultural sector's expenditures in producing corn (labor, capital, raw material, services, etc). In a perfect market without externalities, both the quantity and price of the corn would equilibrate at the intersection of the two curves (Qe and Pe, respectively). However, if the production of corn bears any negative impact on society at large, then the true social cost of corn production has to be greater than MPC. In fact, we already know that the operation of large-scale agricultural practices lead to the transport of excess nutrients (nitrogen, phosphorus) into waterways and receiving coastal systems. These nutrients tend to fertilize the aquatic environment in coastal basins and lead to major changes, which include extended fish kills and changes in ecological structure. Hence, the production of corn comes at a social cost of decreasing production in coastal fisheries and impacted environments. The marginal social cost (MSC) of corn production is thus given by adding the marginal external cost (MEC) to the MPC and the intersection of that curve with the demand curve provides a more efficient value of corn production (Qs; Figure 26).
If not corrected, environmental externalities will cause a misallocation of resources. In particular, too many resources (labor, capital, natural resources) may be allocated to the production of goods and services and not enough to the preservation of environmental quality. As mentioned above, one way to correct for negative externalities is to internalize them by imposing a penalty on the offending agent. Policies used to internalize environmental externalities could have economic-wide effects. For example, the socially optimal level of corn production in Figure 26 is associated with higher prices (Ps instead of Pe) and a lower output (Qs instead of Qe). Within an exclusively economic point of view, the outcome of such adjustment of the market may contribute to inflation (an increase in the aggregate price of goods and services) and unemployment (since less output means less use of labor and capital). However, such impacts may be locally limited (specific to an industry) and not socially distributed. In fact, there seems to be no compelling empirical evidence suggesting that adjustment to markets through the addition of marginal social cost results in negative effects on long-run economic performance. Moreover, the incorporation of pollution abatement technology in new production modes may stimulate both social programs as well as industry interests. Below, we present briefly two main policy approaches have been proposed for dealing with environmental externalities. Return to the top of the Page 3.3.2 Command-and-Control Policies Command-and-control mechanisms are the oldest and most recognized forms of pollution control policies. Such policies set "standards" (i.e. maximum level of pollution allowable) and enforcing structures. There are three different types of standards used to control environmental externalities:
The most importance limitation to standards is that they do not create incentive to reduce pollution. Usually, polluters will limit their action to the most basic level of action that will allow them to meet such standards. Second, penalties for violating such standards are often too low and enforcement tend to be weak or difficult to apply on a large-scale. Third, because marginal social benefit and cost curves of pollution abatement are difficult to observe and measure, the estimate standard emissions are rarely set at the "optimum" level (Qs). Fourth, the establishment of standards is a lengthy process that is not flexible enough and doesn't benefit from continuous and rapid revisions to adapt to new knowledge and changing circumstances. Finally, standards are just that ≥standards≤ and do not allow flexible adjustments at the regional level and production level. On the positive side, standards are accepted and recognized for providing a structure that help protect common resources and environmental quality. For example, when dealing with issues that affect human health (i.e. arsenic in drinking water, ozone in urban atmosphere), standards are considered to provide some precautionary approach (precautionary principle) that seeks to minimize the impact to the public or to the overexploitation of natural resources. Return to the top of the Page 3.3.3 Market-Based Incentive Policies Market-based instruments (MBI) use price or some other economic variables to provide incentives for economic agents to abate pollution. A charged tax, for example, is the equivalent of a negative price that is levied to correct the negative externalities of a market activity. This type of tax, named a Pigovian after the British economist Arthur Pigou, uses two main leverages: on the one hand it is levied on producers to encourage them to reduce the level of pollution per unit of output and/or the absolute level of pollution, and on the other it provides revenue which may be used to counteract the negative effects of the pollution or some other related social cost. For example, the high tax level in the U.K. is used to support education throughout the nation. Figure 27 below illustrates the working of a Pigovian tax. A tax shifts upwards the marginal private cost (MPC) by the amount of the tax (to MPC+T). Faced with this cost increase the producer has the incentive to reduce the output to the social optimum (Qs) by reducing the marginal externality to the marginal tax. The total tax revenue is thus equal to the light green area. Many economists prefer such taxes to other pollution abatement alternatives (particularly standards) because such taxes offer an economic incentive to reduce pollution and choices based on specific individuals/industries rather than a uniform fit-for-all approach set by standards. Compared to standards, there is a stronger cost-effective incentive to adopt new technology in order to lower the taxes charged.
In spite of the above-mentioned advantages, it is difficult to estimate the accurate amount of tax needed to counterbalance a negative externality. There is often much uncertainty as to the exact social cost of an externality and the costs of pollution abatement. In addition, the costs of monitoring emissions are relative high. Finally, such taxes may raise equity issues as part of the cost of the tax is transferred to the consumers (through increased prices) and low-income consumers are excluded from the market (or see their access reduced). Other more flexible incentives include marketable permits, which were introduced first in the U.S. as part of the 1977 Clean Air Act. Under this system, the government issues a fixed number of permits or "right to pollute" equal to the permissible total emissions and distributes them among polluting industries in a given area. A market for permits is established and permits are traded among individual industries. Industries that maintain their emissions levels below their allotted levels can sell their surplus allotment to other industries or use them to offset emissions in other parts of their own activities. The CO2 market that is getting established in Europe is an example of such market approach to pollution abatement. CO2 emissions are ideal for marketable permits since the pollution in one area of the world is relatively well mixed in the atmosphere and thus has no particular impact at the regional or local scale. Marketable permits are sought for example for mercury emissions from thermoelectric plants, but face the issue that a substantial proportion of mercury redeposit closely from the source of emissions. Hence, emissions permits bought from a distance removed from the area may allow a particular industry to keep emitting mercury in large quantity thus inducing increased impacts of pollution at the local scale. In 1990, the Clean Air Amendment Act (CAAA) was established on the main tenets of the 1970 Clean Air Act with a number of new provisions. The CAAA was divided into a number of "Titles" addressing a broad range of pollution control and abatement issues. In particular, Title IV of the CAAA was intended to reduce acidic deposition by regulating sulfur and nitrogen emissions, largely from coal-burning power plants. These reductions built on a 20-year trend of decreasing sulfur deposition. The most innovative feature of Title IV is the establishment of an emissions trading program for sulfur dioxide (SO2), the primary precursor to acid deposition. The goal of the tradeable emissions allowance (EA) system was to allow industry – primarily the steam turbine electricity generating industry – maximum flexibility in undertaking reduction of SO2 emissions by 10 million tons per year through the year 2000. This title also specifies reductions of nitrogen oxides (NOx) of 2 million tons per year. Recent research suggests that most regions of concern have exhibited declines in the primary acidifying chemicals (sulfur) with fewer acidic lakes in some regions of the Northeast. These results suggest some success for the tradable permit approach on reducing emission impacts at the regional scale. However, the continued inputs of NOx from non-point sources (i.e. agriculture) are slowing down the recovery of streams and lakes in the most sensitive regions of the U.S., diminishing the overall effect of the CAAA. This example shows that although tradable permits can provide some significant emission reductions, the synergy of different economic sectors (i.e. industry and agriculture) may buffer the intended positive effect of specific market-based instruments. Return to the top of the Page 3.4 Economic growth To what extent can continued economic growth maintain increasing standards of living? In a neoclassical view, there is a direct link between continued economic growth and social order through an increase real per capita income, which itself increases the demand for further social order and decreasing social inequality. This link between overall per capita income and income inequality was first modeled by economist Simon S. Kuznets who won the 1971 Nobel Prize in Economics for his empirically founded interpretation of economic growth and its relation to development and social structure. A recent revision to Kuznets empirical analysis of development associates the increase in real per capita income to an increased demand for improved environmental quality. The generalized form of this environmental quality-income hypothesis is depicted as an "inverted-U" curve and is called the environmental Kuznets curve (EKC), as shown by Figure 29a. This graph shows that economic development, resulting in rising per capita income, initially results in worsening environmental conditions until a certain point (turning point income) after which environmental quality improves. This conceptual link between economic growth and environmental quality has been shown to have empirical basis for certain types of contaminants (atmospheric particulate matter, sulfur dioxide, nitrogen oxides, water quality) with turning point incomes ranging from $6,000 to $60,000 (in 2003 USD) depending on the environmental quality parameter. When taken at face value, several implications can be drawn from such empirical analyses: 1. It is possible for developing nations to grow out of poor environmental quality conditions based on a quantifiable increase in standard of living. 2. For countries that have already surpassed the turning point income of the EKC, continued income growth will invariably result in improved environmental quality. 3. Environmental policy, when too stringent on economic growth, has the potential of slowing the pace of environmental improvement. This inverted-U curve has been criticized however based on these latter assumptions. For example, Torras and Boyce (1998) suggested that "regrettably, the same incautious policy inference that was often drawn from the original Kuznets curve can be derived from the EKC. That is, if rising per capita income will ultimately induce countries to clean up their environments, then economic growth itself can be regarded as a remedy to environmental problems. Environmental concerns may [thus] be downplayed as a transitional phenomenon which growth in due course will resolve". Grossman end Krueger (1995), who themselves found empirical evidence for an EKC relationship for 12 out of 14 air and water quality variables, further suggested that "there is no reason to believe the process is an automatic one ä there is nothing at all inevitable about the relationships that have been observed in the past". In fact, for countries in the upper-income range, there is evidence that despite improvements in some indicators (i.e. air quality), rising average income is actually accompanied by a renewed deterioration in some dimensions of environmental quality (Figure 29b). Figure 29: The environmental Kuznets curve (EKC). The vertical axis represents change in environmental quality (negative upwards and positive downwards). The horizontal axis represents change in real per capita income. Panel a) shows the typical EKC hypothesis whereby environmental quality improves in a particular country after a certain level of per capita income has been reached (turning point income). Panel b) suggests that the trend in environmental quality improvements does not hold indefinitely and eventually may reverse with further increases in average income. For example, energy, land and resource use (sometimes called the "ecological footprint") do not fall with rising income. While the ratio of energy per real GDP has fallen, total energy use is still rising in most developed countries. In addition, the status of many key ecosystem services provided by ecosystems, such as freshwater provision and regulation, soil fertility, and fisheries, have continued to decline in developed countries. Globally, as much as 30-60% of all resources are now being used or are undergoing depletion by human activities (Figure 30).
Return to the top of the Page This amount of resource allocation and extraction suggests that natural environments are being oversubscribed and that natural ecosystem services, such as the assimilative capacity of the environment (the capacity to assimilate and clean up waste), have been drawn down (Figure 31). Indeed, long terms sustainability depends not simply on the level of emissions of a particular pollutant (and resource depletion) but also on the capacity of natural systems to absorb and process wastes (and renew resources). Hence assuming that continued economic growth will necessarily lead to environmental improvements seems rather simplistic when one considers the complexity of ecosystems and human systems interactions. Granted, as Grossman and Krueger (1995) state "putting brakes on economic growth in the developing world is not an acceptable, or even wise, response to the pressing environmental concerns of our time". The real problem is that the EKC approach attaches too much significance to the role that growth in income plays in the improvement of environmental quality. Most importantly, if taken at face value, the EKC hypothesis has the effect of projecting environmental policy as either irrelevant or of little use. That is without a doubt a distortion of how environmental improvement has been advancing over time. Increase in per capita income (and associated social indicators such as literacy) has indeed lead to increased demand for stronger demands for environmental quality. However, such economic growth needs to be accompanied by policy structures that support more equitable power distribution (particularly in developing nations) to translate into measurable effects on environmental quality improvement. We may conclude by citing Ekins (2000) that "any improvements in environmental quality as income increases are likely due to the enactment of environmental policy rather than endogenous changes in economic structure and technology". Thus the argument rests on the relative role of economics and policy on social structures and environmental quality. The interplay of these opposing forces may lead to either too much control from one and thus lead to a disproportionate impact on either the economy or the environment. How society seeks to blend these influences into a socio-politico-economic system is the basis of sustainable development and requires, as sustainability implies, that ecosystems services and renewal are taken in consideration (Figure 32).
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In which of the following ways the neoclassical economics contribute to environmental problems?
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