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For What It’s Worth: Costs and Complexities in Environmental Economics

For What It’s Worth: Costs and Complexities in Environmental Economics

October 12, 2020

K V Kelly, Graduate Student Researcher, MEES Program, UMES

Have you ever wondered, how much is our environment worth?1 If you had to put a price tag on the environment, what would it be?  Millions of dollars?  Billions?  Ecological Economist, Robert Costanza, et al.2, estimate that the ecosystem services3 and functions our environment provides, are worth an average of about $33 trillion annually.  Our Environment and Society class discussed this topic last week, led by Dr. Lisa Wainger, guest lecturer and research professor of environmental economics at the University of Maryland Center for Environmental Science, Chesapeake Biological Laboratory.  Through Dr. Wainger’s comprehensive lecture and the Q&A session that followed, we discovered that it is not only possible to evaluate the worth of the environment, but essential to enabling the enactment of effective environmental policy and monitor its ongoing progress.

Tropical rainforests provide supporting ecosystem services including species habitat and biodiversity, natural resources, and air quality regulation. (A view from atop rainforest, El Yunque, Puerto Rico by K V Kelly, 2019).

What is Environmental Economics?
When you hear the word “economics”, your mind default to the Bloomberg report, home loan interest rates, or the stock market indices to back them up.  Environmental economics does share some of the tenets of traditional economics, but it is by no means the linear cost theory model that one might expect.  It operates on a foundation of conventional economic theories nuanced for the best management of:  (1) environmental externalities, (2) common property and the public good, (3) natural resources, and (4) economic valuation of environmental goods and services4.  Dr. Wainger highlighted four (4) key concepts – economic value, moral philosophy, valuation, and efficient environmental policy - that define environmental economics in practice.  As a discipline, it seeks to provide tools and data that help limit market failures and externalities, and efficiently manage common property resources and public goods to the advantage of as much of society as possible.

Key Concept #1:  Economic Value
The first concept considers what an environmental good is worth in terms of market price, utility, and its Total Economic Value (TEV).  This can be more challenging than it sounds because both use and non-use values5  are weighed as economic indicators in this equation.  Many people, for example, enjoy going to the beach.  Activities like sun-bathing, fishing, or boating represent direct use of this resource; an indirect use value would be the ocean’s role in the hydrologic cycle6 which is a major engine for sustaining life on our planet.  On the other hand, there are non-use or passive use values for this same good, the ocean.  Perhaps you are not a fan of the beach, but you enjoy the fact that it is available for others now and in the future, or that it exists, period.  That, too, represents a part of the TEV.  One challenge if this were used as a sole indicator is that it is subjective and therefore does not lend itself easily to quantification.  To balance this, Environmental economists will use surveys, market research, consumer surplus data to assist with defining these metrics. 

Key Concept #2: Moral Philosophy
Operating from the perspective of societal benefit, economic methods infer that people make decisions based on what benefits them or satisfies their wants or needs.  A policy is generally determined to be viable if more people benefit from a policy than do not benefit.  An example of how this process is provided in the Goulder and Parry article, Instrument Choice in Environmental Policy.7  As with traditional economics, there is necessary consideration given to costs associated with imposed policies and their potential impact on industry, society, the economy, and the environment.       

Key Concept #3: Valuation and Public Policy
Many are aware of the mission of the Environmental Protection Agency (EPA) and their role in environmental management.  The Goulder and Parry article introduces some of the tools used by the EPA to limit air pollution -emissions taxes, regulatory policies, tradable allowance systems – and their relative value in practice.  The EPA used analyses compiled by environmental economists to inform decisions about emissions control policies.  Environmental economics conducts cost-benefit analyses (CBA) to measure if the benefits of a policy are greater than the costs of imposing and maintaining a policy.  A policy or project is deemed “socially efficient” and “in society’s best interest “under such conditions.  The cost-effective analyses (CEA) are a metric for determining whether a project or policy has an acceptable cost to benefit ratio and seeks the least expensive pathway to achieving the desired result.  Governmental bodies like the Environmental Protection Agency (EPA), will refer to these analyses to determine whether (or not) to regulate the use of materials, practices, etc. that threaten public safety and well-being.

“Environmental economics: Concepts & application to public policy, and air quality regulation.” Dr. Lisa Wainger, 2020.

 

Key Concept #4: Efficient Environmental Policy
The final concept encompasses the previous three in that it focuses on accomplishing the goal of best management practices of environment-related issues in the most efficient manner possible.  Analytical instruments like CBA, CEA, and TEV, are part of the arsenal of tools used to propose and evaluate an environmental policy that achieves its aims at costs that are conservative in comparison to anticipated benefits.  Organizations like the Environmental Protection Agency and other decision-makers rely on such analyses to review environmental policy and protect the public.  This is often a balancing act between benefits and tradeoffs,     

There are, of course, problems with adhering to strict economic formulas or data analysis for decision-making, including risk factors associated with policy and practices.  As Van Houtven & Cropper noted, in their article, “When is a Life Too Costly to Save:  The Evidence from U.S. Environmental Regulations8 the distribution of risk requires consideration and risk equity must be weighed across populations and individuals (Van Houtven & Cropper, 1996).  It is important to consider how social capital may be weighted to the advantage of certain individuals or groups and, conversely, disproportionately to the disadvantage of others.  This point was underscored by a classmate who shared the article “Implications of Limiting CO2 Concentrations for Land Use and Energy9 and asked about how environmental economics and policy deals with the problem of “leakage” - negative impacts that emerge from environmental interventions established to correct or control other negative effects.  Dr. Wainger acknowledged that this is one of the complexities for which environmental economics’ valuation models are equipped to consider, adding that, “Being a systems thinker is the best way to good environmental policy.”  So, what does this mean for the rapidly evolving and diverse field of environmental management?

Farming and agriculture have been at the center of the controversy over environmental pollutants, especially nitrogen and phosphorous nutrient loading that contributes to eutrophication or “dead zones” in the Chesapeake Bay watershed. (By K V Kelly, 2020)

Use, Utility, and the Future of the Environment
If nations are to progress in the race to the 2030 Sustainable Development Goals10 with any degree of precision, reliable and replicable tools are required.  Environmental economics is a rapidly evolving approach to doing exactly that, helping stakeholders and decisionmakers assess impacts from the perspective of natural resource management, climate change, environmental externalities, and the application of resources and policy to address them.  The future of environmental management is interdisciplinary11 – natural resource management, science, policy, academia, industry, technology12, tradespeople, and engaged communities working in concert to respond to issues that impact us all. 

It is possible to see witness this awakening at many levels of society – from websites like Ecosia13 and OceanHero14 that are engineered for point-and-click activism, to the Coors Seltzer River Project15 that is giving back to nature while strengthening and perhaps expanding brand loyalty, and countries expanding their concept of what else is worthy of measuring16. The natural environment is the ultimate in nourishment, recreation, education, entertainment, and sanctuary.  While it is necessary for the sake of management and policy that we quantify its value, the fact is that in many ways, our environment is of infinite, immeasurable value.  We need access to nature17, and not just for tangible resources.  In my view, our natural environment is a living, evolving work of art.  My time spent observing nature and the photos I capture are sources of sacredness and awe that have no duplicate or substitute.  Dr. Wainger concluded the other day with “for what it’s worth…” referring to her lecture.  Tools like environmental economics are a key part of helping to manage and preserve this irreplaceable and infinitely valuable resource that we inhabit and enjoy.  That is worth quite a lot.

Photo: “Meditation7” by K V Kelly, 2019

CITATIONS

  1. Steiner, A. (2015, October 08). How Much Is the Environment Worth? Retrieved October 12, 2020, from https://time.com/4065215/environment-price/
  2. Costanza, R. (2020). Valuing natural capital and ecosystem services toward the goals of efficiency, fairness, and sustainability. Ecosystem Services, 43, 101096. doi:10.1016/j.ecoser.2020.101096
  3. Supporting services. (n.d.). Retrieved October 12, 2020, from http://www.fao.org/ecosystem-services-biodiversity/background/supporting-services/en/
  4. Harris, J. M., & Roach, B. (2018). Environmental and natural resource economics: A contemporary approach (4th ed.). New York, NY, NY: Routledge.  https://www.routledge.com/Environmental-and-Natural-Resource-Economics-A...
  5. Wainger, Lisa A. & Helcoski, Ryan & Farge, Kevin W. & Espinola, Brandy A. & Green, Gary T., 2018. "Evidence of a Shared Value for Nature," Ecological Economics, Elsevier, vol. 154(C), pages 107-116.  https://ideas.repec.org/a/eee/ecolec/v154y2018icp107-116.html
  6. Hydrologic Cycle. (n.d.). Retrieved October 12, 2020, from https://gpm.nasa.gov/education/water-cycle/hydrologic-cycle
  7. Van Houtven, G., & Cropper, M. L. (1996). When is a Life Too Costly to Save? The Evidence from U.S. Environmental Regulations. Journal of Environmental Economics and Management, 30(3), 348-368. doi:10.1006/jeem.1996.0024
  8. Goulder, L. H., & Parry, I. W. (2008). Instrument Choice in Environmental Policy. Review of Environmental Economics and Policy, 2(2), 152-174. doi:10.1093/reep/ren005
  9. Wise, M., Calvin, K., Thomson, A., Clarke, L., Bond-Lamberty, B., Sands, R., … Edmonds, J. (2009). Implications of limiting co₂ concentrations for land use and energy. Science, 324(5931), 1183–1186.  https://science.sciencemag.org/content/324/5931/1183.full
  10. Sustainable Development Goals. (n.d.). Retrieved October 12, 2020, from https://www.undp.org/content/undp/en/home/sustainable-development-goals....

Comments

Katrina, Both Lisa's lecture and your take on the lecture, the readings and the various additional resources you brought into the blog were so worth it. Thanks for the key concepts that nicely distilled environmental economics and I really liked the way you ended the blog: saying that tools like environmental economics are worth quite a lot. I agree. In your key concept #2, you discuss moral philosophy, which is one of the themes in Lisa's approach. When I was first introduced to the world of environmental economics, I had no idea how much economists think about the morality of how humans interact with the environment. I naively thought that economists were only about the money. But, as you point out, the subject of valuing the environment leads into very philosophical considerations--often probing deeply into our motivations, our ethics and our humanity.  Your line that nature is a living, evolving work of art really spoke to me. This statement reminds me that natural science approaches and social science approaches are really just different ways of approaching the elusive truth--and both human beings and nature represent the integration of these two approaches. Which is a nice way to summarize the Environment & Society foundation. Thanks for your take on environmental economics Katrina and thanks to Lisa for her fantastic contribution to our course. Bill

Katrina, you provide a rich outline of not just Dr. Wainger's lecture, but also your own background research on environmental economics that provides a concise and highly readable explanation of key concepts. While I appreciate the distillation and augmentation of the information from class, the part of this blog that sticks with me is your final note. You state that nature is infinite, even if we must place a dollar value on it as a policy tool. I read the Costanza paper in undergrad, and ever since, the idea that nature is hard to price has been one of my struggles with environmental economics. Certainly, you can attempt to quantify the services it provides, like food and clean water. It is much hard to quantify the joy and sacredness that many people feel from the natural world. Dr. Wainger's lecture helped me to feel better about this, with her emphasis on how economists are trying to improve people's lives be creating efficient policies. I fully agree with you that environmental economics can be a tool for such work. Just because a certain tool provides an incomplete evaluation of all the values of a resource, do not mean that that tool is not useful. Thank you for eloquently reinforcing this important takeaway.
~Aubrey

This topic reminded me of the documentary ‘Curiosity: What's America Worth’ I’m watching recently. The United States is worth 280 trillion U.S. dollars. Like your first point, it mainly starts from the market price, but ignores the consideration of social value, cultural value, policy value, etc. Quantification helps us to face problems more intuitively and easily, just like we know that an exam is difficult, but if it has explained how many questions it will test, and how many words each question is about to write, the difficulty would dropped a lot. Environmental economics also has the same idea, visualizing the problem. But for those things that are difficult to be evaluated, we can use methods from other disciplines, such as ecology, sociology, anthropology, etc., and finally coordinate and combine different governance plans into a unified Plan, this will be more feasible for us to solve environmental issue. For me personally, it is really difficult for me to understand some things in the liberal arts. Just like some materials I read when I first went to MEES620, I was refreshed and at the same time confused. I felt that I was in the same state with the EPA in article: we know the truth and understand what it is saying, but when we want to show it, we can’t find a suitable way to present it. There are thousands of words in hearts but we can only choose the most understandable form for myself and others and write it on paper.

Thanks for your recap - this tracks very well with the talking points and discussion. Given the extent to which the economy has become a truly global system of production and exchange, it is increasingly important to understand the dynamics of human activities and how environmental externalities could be reduced, stabilized, and perhaps eventually eliminated over time in the case of the most polluting sources of energy. Perhaps the current pandemic could add impetus to this effort..
One of the fundamental issues that I encountered in my previous graduate program of study (M.A. Anthropology) concerned the human actor in the context of land-use / land-cover (LULC) change. Can we really continue to regard humans as "homo economicus" per the rational actor model? Local scale change can be accounted for to some extent by looking at LULC change in terms of von Thunian concepts of land rent, later adapted by economists such as Angelsen (World Bank) and Kaimowitz. Distal influences resulting from market forces (e.g. investment and trade), government policies (e.g. resettlement, subsidies, taxes, zoning, etc.) can be understood from a telecoupling perspective.
However, there is still beneath all this human activity underlying questions of value - and those values are not necessarily reducible to extrinsic factors that can be precisely quantified. So, on the social side, I definitely appreciate Wainger's work in this regard (i.e. non-use values) that she is bringing to the forefront. And on the ecological side, it does appear Constanza and his colleagues have done some pioneering work, some of which I had read as part of GEOG615 (Prof. Hurtt). That course will be run again in Spring 2021 for those who might be interested.
One last item that I would mention for those who *might* be interested in digging into ecological economics is the Gund Institute at the University of Vermont, which is working toward a vision for structural transformation of the economy away from the open-loop, endless growth model (URL: https://www.uvm.edu/gund/ecological-economics ). For reasons that we may explore more this week linked to politics / power, some of those ideas may seem farfetched given the current leadership. However, I think that there is both intellectual merit and potential for broader impacts inherent in their efforts to reconcile humans within planetary boundaries, which many observers find we are on the verge of overshooting or exceeding.

I enjoyed your discussion on how environmental economics has much utility in evaluating the progress towards the SDGs. The incentive-based policy instrument like the carbon credit or the cap-and-trade scheme is also initialized by the Kyoto Protocol at the international level to encourage offsetting and mitigating activities. I think such structure or mechanism largely benefited from economic ideas and thoughts. In implementation, I see to measure the carbon emission and carbon sequestration, especially the ones associated to LCLUC, like Krik has discussed, requires consistent and objective monitoring and quantification, thus, potentially needs to be linked up with domains like remote sensing. So from remote sensing perspective, carbon credit is approached as an end goal of our measurements, and the more instrumental perspective as discussed in this lecture by Lisa definitely provides me an alternative view to understand carbon trading system from a policy-maker's perspective.

This was such a great explanation of environmental economics! Before this, I had absolutely no understanding of anything economically related. This was such a good break down of what each concept was, referencing our last lecture and the readings too. I didn't realize how much went into economist environmentalists' decision making, and it's reassuring in some sense that they are interdisciplinary. It will be interesting to see how this changes moving forward to potentially include more of the networked governance approach so that their research and policy implementation will be more effective. I really liked how you brought it back in the end to the sustainable development goals because they really do help us focus on what is important to attack next, and utilizing environmental economists will be important because they look into everything from morality, public policy, and economic value to create efficient and successful environmental policy that will positively affect our planet. - Ari