Uncertainty in Environmental Economics

In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty, over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons. Correctly incorporating uncertainty in policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty, to my knowledge, none exist. Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don't know about the problem.

Uncertainty In Environmental Economics

In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty -- over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons. Correctly incorporating uncertainty in policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty -- to my knowledge, none exist. Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don't know about the problem.

Uncertainty in environmental economics

In a world of certainty, the design of environmental policy is relatively straightforward, and boils down to maximizing the present value of the flow of social benefits minus costs. But the real world is one of considerable uncertainty -- over the physical and ecological impact of pollution, over the economic costs and benefits of reducing it, and over the discount rates that should be used to compute present values. The implications of uncertainty are complicated by the fact that most environmental policy problems involve highly nonlinear damage functions, important irreversibilities, and long time horizons. Correctly incorporating uncertainty in policy design is therefore one of the more interesting and important research areas in environmental economics. This paper offers no easy formulas or solutions for treating uncertainty -- to my knowledge, none exist. Instead, I try to clarify the ways in which various kinds of uncertainties will affect optimal policy design, and summarize what we know and don't know about the problem

Cost-Benefit Default Principles

In an important but thus far unnoticed development, federal courts have created a new series of "default principles" for statutory interpretation, authorizing regulatory agencies, when statutes are unclear, (a) to exempt trivial risks from regulation and thus to develop a kind of common law of "acceptable risks," (b) to take account of substitute risks created by regulation, and thus to engage in "health-health" tradeoffs, (c) to consider whether compliance with regulation is feasible, (d) to take costs into account, and (e) to engage in cost-benefit balancing, and thus to develop a kind of common law of cost-benefit analysis. These cost-benefit default principles are both legitimate and salutary, because they give rationality and sense the benefit of the doubt. At the same time, they leave many open questions. They do not say whether agencies are required, and not merely permitted, to go in the direction they indicate; they do not indicate when agencies might reasonably reject the principles; and they do not say what, specifically, will be counted as an 'acceptable' risk or a sensible form of cost-benefit analysis. Addressing the open questions, this essay urges that the principles should ordinarily be taken as mandatory, not merely permissive; that agencies may reject them in certain identifiable circumstances; and that steps should be taken toward quantitative analysis of the effects of regulation, designed to discipline the relevant inquiries. An understanding of these points should promote understanding of emerging "second generation" debates, involving not whether to adopt a presumption in favor of cost-benefit balancing, but when the presumption is rebutted, and what, in particular, cost-benefit analysis should be taken to entail.

Environmental management in development : the evolution of paradigms

In the past quarter century, environmental management has increasingly become a concern of governments. More recently, the traditional split between developers and conservationists has begun to break down. Conceptions of what is economically and technologically practical, ecologically necessary, and politically feasible are rapidly changing. This report discusses the implications of five paradigms of environmental management in development. The author notes that the remedial legalistic approach of environmental management is breaking down. Instead, interest in the more economically integrated approach of resource management has recently taken hold. Several interdependent forces indicate that improving the economic management of pollution and resources may be a necessary but insufficient measure to create the conditions for sustainable development. The perception of tradeoffs between development and environmental quality persists in the present debate, but its necessity is greatly exaggerated, according to this paper. Finally, it is noted that paradigms may be impervious to evidence, and institutions and societies too difficult to change. Whether, when and how these issues are resolved may be modern civilization's most significant test.Environmental Economics&Policies,Agricultural Knowledge&Information Systems,Health Monitoring&Evaluation,Natural Resources Management,Agricultural Research

Two Conceptions of Irreversible Environmental Harm

The concept of irreversibility plays a large role in the theory and practice of environmental protection. Indeed, the concept is explicit in some statements of the Precautionary Principle. But the idea of irreversibility remains poorly defined. Because time is linear, any loss is, in a sense, irreversible. On one approach, drawn from environmental economics, irreversibility might be understood as a reference to the value associated with taking precautionary steps that maintain flexibility for an uncertain future ( option value ). On another approach, drawn from environmental ethics, irreversibility might be understood to refer to the qualitatively distinctive nature of certain environmental harms—a point that raises a claim about incommensurability. The two conceptions fit different problems. For example, the idea of option value best fits the problem of climate change; the idea of qualitatively distinctive harms best fits the problem of extinction of endangered species. These ideas can be applied to a wide assortment of environmental problems

Two Conceptions of Irreversible Environmental Harm

The concept of "irreversibility" plays a large role in the theory and practice of environmental protection. Indeed, the concept is explicit in some statements of the Precautionary Principle. But the idea of irreversibility remains poorly defined. Because time is linear, any loss is, in a sense, irreversible. On one approach, drawn from environmental economics, irreversibility might be understood as a reference to the value associated with taking precautionary steps that maintain flexibility for an uncertain future ("option value"). On another approach, drawn from environmental ethics, irreversibility might be understood to refer to the qualitatively distinctive nature of certain environmental harms—a point that raises a claim about incommensurability. The two conceptions fit different problems. For example, the idea of option value best fits the problem of climate change; the idea of qualitatively distinctive harms best fits the problem of extinction of endangered species. These ideas can be applied to a wide assortment of environmental problems

Methodological aspects of recent climate change damage cost studies

This paper discusses methodological aspects of recent climate change damage studies. Assessing the total and/or marginal damage costs of environmental change is often difficult and it is certainly difficult in the case of climate change. A major obstacle is the uncertainty on the physical impacts of climate change, especially related to extreme events and so-called ‘low-probability high-impact’ scenarios. The subsequent transposition of physical impacts into monetary terms is also a delicate step, given that climate change impacts involve both market and non-market goods and services, covering health, environmental and social values, and that impacts may be distant in time and space. The complexity of climate change cost assessment thus involves several crucial dimensions, including non-market evaluation, risk and uncertainty, baseline definition, equity and discounting, further elaborated in this paper in the course of the overview of the literature and of the overview and evaluation of the key methodological issues.Climate change damage costs, cost of inaction, methodological aspects, risk and uncertainty, discounting, equity