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This is an area that has been even more contentious, both in the policy world and among scholars. Here the core question is whether and how environmental amenities can be valued in economic terms for analytical purposes. Trudy Cameron Chapter 4 provides a valuable guide to a concept that is both important in assessments of the benefits of environmental regulations and is also widely misunderstood — the value of a statistical life. There are two principal policy questions that need to be addressed in the environmental realm: how much environmental protection is desirable; and how should that degree of environmental protection be achieved?
In Part III, the criterion of economic efficiency and the analytical tool of benefit—cost net present value analysis are considered as ways of assessing the goals of environmental policies.
Energy economics : markets, history and policy
In an introductory essay, Kenneth Arrow and his co-authors Chapter 8 ask whether there is a role for such analysis to play in environmental, health, and safety regulation. Then, Lawrence Goulder and I Chapter 9 focus on a key ingredient of benefit—cost analysis that non-economists often find confusing or even troubling — intertemporal discounting. Next, Kenneth Arrow and another set of co-authors Chapter 10 focus on the possibility of a declining discount rate, which can be very important for analyzing long-term phenomenon, such as climate change. Finally, Ted Gayer and Kip Viscusi Chapter 11 provide a critique of what they perceive to be the ways in which the principles of benefit—cost analysis have been abused in some regulatory impacts analyses carried out by the federal government.
Part IV examines the policy instruments — the means — that can be employed to achieve environmental targets or goals. This is an area where economists have made their greatest inroads of influence in the policy world, with tremendous changes over the past 30 years in the reception given by politicians and policy makers to so-called market-based or economic-incentive instruments for environmental protection. Richard Schmalensee and I Chapter 12 start things off by identifying lessons that have been learned from three decades of experience with cap-and-trade systems in Europe and the United States.
In the next chapter, Schmalensee and I Chapter 13 examine the ironic history of one particularly important application — the SO 2 allowance trading system, enacted by the Clean Air Act Amendments of The following article, by Karen Fisher-Vanden and Sheila Olmstead Chapter 14 , recognizes that virtually all prominent applications of emissions trading systems have been for air pollutants of various types, and examines the opportunities and challenges of using such instruments to address water quality problems.
A natural extension is provided by Thomas Covert , Michael Greenstone , and Christopher Knittel Chapter 16 in an article in which they ask whether market forces of supply and demand will lead to severe reductions in the use of fossil fuels. Then Sheila Olmstead Chapter 17 applies similar thinking to the management of water resources, and Severin Borenstein Chapter 18 examines the economics of renewable electricity generation. The next four sections of the book treat a set of timely and important topics and problems. Part VI is dedicated to analysis of economic dimensions of global climate change, which appears to be the most significant environmental problem that has yet arisen, both in terms of its potential damages and in terms of the costs of addressing it.
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Following this, Richard Newell , William Pizer , and Daniel Raimi Chapter 22 examine what was accomplished with the use of carbon markets in various parts of the world in the 15 years after the global climate agreement known as the Kyoto Protocol. Of course, after Kyoto, the next major global agreement in this realm was the landmark Paris Agreement of Daniel Bodansky , Seth Hoedl , Gilbert Metcalf , and I Chapter 23 analyze how linking heterogeneous national policies can lower the cost of achieving national targets and thereby facilitate increased ambition under the Paris Agreement.
Finally, Richard Tol Chapter 24 turns from the cost side to the benefit side of climate policy by examining the anticipated economic impacts of unabated climate change. Part VII examines another important area of exploration in environmental economics: sustainability, the commons, and globalization. Robert Solow Chapter 25 begins with an economic perspective on sustainability. Then, we turn to the topic of corporate social responsibility and the environment, discussion of which has too often been characterized by more heat than light.
Forest Reinhardt , Richard Vietor , and I Chapter 28 provide an economic perspective by examining the notion of firms voluntarily sacrificing profits in the social interest. The essays in the book can apply in the context of a diverse set of countries, but developing countries face a special set of challenges.
So, this section closes with Michael Greenstone and Kelsey Jack Chapter 29 providing a broad examination of the relationship between economic development and environmental protection. Next, in Part VIII, we feature applications of the emerging area of behavioral economics to environmental issues, beginning with an overview of this terrain by Jason Shogren and Laura Taylor Chapter Then, Cass Sunstein and Lucia Reisch Chapter 31 examine the implications of behavioral economics for the types of public policies that are most likely to be effective.
The final section of the book, Part IX, departs from the normative concerns of much of the volume to examine some interesting and important questions of political economy. It turns out that an economic perspective can provide useful insights into questions that might at first seem fundamentally political. Myrick Freeman Chapter 33 reflects on the benefits that U.
And Robert Hahn Chapter 34 addresses the question that many of the articles in this volume raise: what impact has economics actually had on environmental policy? Preparing the various editions of this book has caused me to review hundreds of articles, and this has allowed me to identify some common themes that have emerged. First, there is the value — or at least, the potential value — of economic analysis of environmental policy. The cause of virtually all environmental problems in a market economy is economic behavior that is, imperfect markets affected by externalities , and so economics offers a powerful lens through which to view environmental problems, and therefore a potentially effective set of analytical tools for designing and evaluating environmental policies.
A second message, connected with the first, is the specific value of benefit—cost analysis for helping to promote efficient policies. Economic efficiency ought to be one of the key criteria for evaluating proposed and existing environmental policies. Despite its limitations, benefit—cost analysis can be useful for consistently assimilating the disparate information that is pertinent to sound decision making.
If properly done, it can be of considerable help to public officials when they seek to establish or assess environmental policies. Third, the means governments use to achieve environmental objectives matter greatly. Different policy instruments have very different implications in terms of both benefits and costs, including abatement costs in both the short and the long term. Market-based instruments can enable the minimization of these costs.
Fourth, an economic perspective is also of value when reflecting on the use of natural resources, whether land, water, fisheries, or forests. Excessive rates of depletion are frequently due to the nature of the respective property-rights regimes, in particular, common property and open-access. Economic instruments — such as ITQ systems in the case of fisheries — can and have been employed to bring harvesting rates down to socially efficient levels. Fifth and finally, policies for addressing global climate change, linked with emissions of carbon dioxide and other greenhouse gases, can benefit greatly from the application of economic thinking.
On the one hand, the long time-horizon of climate change, the profound uncertainty in quantitative links between emissions and actual damages, and the possibility of catastrophic climate change present significant challenges to conventional economic analysis. But, at the same time, the ubiquity of energy generation and use in modern economies means that only market-based policies — essentially carbon-pricing regimes — are feasible instruments for achieving truly meaningful emissions reductions.
Hence, despite the challenges, an economic perspective on this grandest of environmental threats is essential. Environmental economics is a rapidly evolving field. Not only do new theoretical models and improved empirical methods appear on a regular basis, but entirely new areas of investigation open up when the natural sciences indicate new concerns or the policy world turns to new issues. Therefore, this volume of collected essays remains a work in progress. I owe a great debt of gratitude to the teachers, students, and other readers of previous editions who have sent their comments and suggestions for revisions.
Thanks are also due to Patrick Behrer , who provided superb research assistance in producing this Seventh Edition. Looking to future editions, I invite all readers — whether teachers, students, or practitioners — to send me your suggestions for improvement. Skip to content At a time when there are considerable political challenges in some countries such as my own! Background Climate change is a global commons problem, and, as such, requires cooperation at the highest jurisdictional level — that is, international cooperation among national governments — if it is to be adequately addressed.
The Workshop and its Analyses Participants in the Beijing workshop examined how Chinese provinces and municipalities work with the central government to implement policy — and discussed challenges to such cooperation.