Environmental Economics

This article provides an overview of the economics of environmental policy, including the setting of goals and targets, notably the Kaldor-Hicks criterion and the related method of assessment known as benefit-cost analysis. Also reviewed are the means of environmental policy, that is, the choice of specific policy instruments, featuring an examination of potential criteria for assessing alternative instruments, with focus on cost-effectiveness. The theoretical foundations and experiential highlights of individual instruments are reviewed, including conventional command-and-control mechanisms and market-based instruments.

A Methodological Investigation of Cost of Carbon Sequestration

Increased attention by policy makers to the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide. This approach has, in fact, become an explicit element of both U.S. and international climate policies. This paper develops a methodology whereby estimates of the costs of carbon sequestration can be developed on the basis of evidence from observations of landowners' behavior when confronted with the opportunity costs of alternative land uses. The analytical model takes account of silvicultural understanding of the intertemporal linkages between deforestation and carbon emissions, on the one hand and between forestation and carbon sequestration, on the other. The results support the efficacy and potential value of this analytical approach. The paper is intended to be illustrative of how econometric analyses of land use, which already exist for a number of countries, can be used to develop better region-specific estimates of the marginal costs of carbon sequestration.

Can an Effective Global Climate Treaty be Based on Sound Science, Rational Economics, and Pragmatic Politics?

The Kyoto Protocol (1997) to the United Nations Framework Convention on Climate Change (1992) may come into force without U.S. participation, but its effects on climate change will be trivial. At the same time, the economic and scientific consensus points to the need for a credible international approach. A reasonable starting point is the Framework Convention on Climate Change (FCCC), which was signed by 161 nations and ratified by 50, including the United States, and entered into force in 1994. In this paper, I remain agnostic on the question of the Kyoto Protocol's viability. Some analysts see the agreement as deeply flawed, while others see it as an acceptable or even excellent first step. But virtually everyone agrees that the Protocol is not sufficient to the overall challenge, and that further, subsequent steps will be required. This is my starting point for proposing a three-part policy architecture: first, all nations would be involved through the use of economic trigger mechanisms, such as growth targets; second, long-term targets would be required, in the short-term, firm, but moderate targets, and in the long-term, flexible, but much more stringent targets; and third, market-based policy instruments would be part of the package, emissions trading, carbon taxes, or hybrids of the two. This overall approach can be made to be scientifically sound, economically rational, and politically pragmatic.

The Problem of the Commons: Still Unsettled after 100 Years

The problem of the commons is more important to our lives and thus more central to economics than a century ago when Katharine Coman led off the first issue of the American Economic Review. As the U.S. and other economies have grown, the carrying-capacity of the planet - in regard to natural resources and environmental quality — has become a greater concern, particularly for common-property and open-access resources. The focus of this article is on some important, unsettled problems of the commons. Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open access. An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality. A key contribution of economics has been the development of market-based approaches to environmental protection. These instruments are key to addressing the ultimate commons problem of the twenty-first century - global climate change.Common-Property Resource, Open-Access Resource, Fisheries, Global Climate Change

Economic Analysis of Global Climate Change Policy: A Primer

Global climate change, perhaps even more than other environmental problems , can be addressed successfully only with a solid understanding of its economic dimensions. This paper, prepared as an introduction to the economics section of a forthcoming book from the Pew Center on Global Climate Change, provides a primer for non-economists on how economic analysis can be brought to bear on three broad questions: what will be the benefits of global climate policies; what will be their costs; and how can this information about alternative policies be assimilated in ways that are ultimately most useful for decision makers. Because of the magnitude of the anticipated benefits and costs of addressing the threat of global climate change, its great time horizons, massive uncertainties, and physical and economic irreversibilities, public policy in this area presents significant challenges to economic research. Nevertheless, a firm foundation is provided by the existing literature from nearly three decades of related theoretical and empirical economic analysis.Environment, Technology and Industry, Regulatory Reform, Other Topics

Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System

There is growing impetus for a domestic U.S. climate policy that can provide meaningful reductions in emissions of CO2 and other greenhouse gases. I describe and analyze an up- stream, economy-wide CO2 cap-and-trade system which implements a gradual trajectory of emissions reductions (with inclusion over time of non-CO2 greenhouse gases), and includes mechanisms to reduce cost uncertainty. Initially, half of the allowances are allocated through auction and half through free distribution, with the share being auctioned gradually increasing to 100 percent over 25 years. The system provides for linkage with emission reduction credit projects in other countries, harmonization over time with effective cap-and-trade systems in other countries and regions, and appropriate linkage with actions taken in other countries, in order to establish a level playing field among domestically produced and imported products.Cap-and-Trade System, Carbon Dioxide, Greenhouse Gas Emissions, Global Climate Change, Carbon Taxes

The Problem of the Commons: Still Unsettled After 100 Years

The problem of the commons is more important to our lives and thus more central to economics than a century ago when Katharine Coman led off the first issue of the American Economic Review. As the U.S. and other economies have grown, the carrying-capacity of the planet — in regard to natural resources and environmental quality — has become a greater concern, particularly for common-property and open-access resources. The focus of this article is on some important, unsettled problems of the commons. Within the realm of natural resources, there are special challenges associated with renewable resources, which are frequently characterized by open access.An important example is the degradation of open-access fisheries. Critical commons problems are also associated with environmental quality. A key contribution of economics has been the development of market-based approaches to environmental protection. These instruments are key to addressing the ultimate commons problem of the twenty-first century — global climate change.common-property resource, open-access resource, fisheries, global climate change

Storing Carbon in Wood: A Cheaper Way to Slow Climate Change

The straightforward way to slow climate change is to reduce the quantity of greenhouse gases (in particular, carbon dioxide) dumped into the atmosphere, giving the planet more time to recycle the offending chemicals. But in light of our late start, chances are we’re going to need all the help we can get to prevent brutal changes in weather, widespread coastal fl ooding and perhaps even the spread of diseases now confi ned to the tropics. Hence the logic in giving nature a helping hand in sequestering atmospheric carbon.

Addressing Climate Change with a Comprehensive U.S. Cap-and-Trade System

There is growing impetus for a domestic U.S. climate policy that can provide meaningful reductions in emissions of CO2 and other greenhouse gases. I describe and analyze an up-stream, economy-wide CO2 cap-and-trade system which implements a gradual trajectory of emissions reductions (with inclusion over time of non-CO2 greenhouse gases), and includes mechanisms to reduce cost uncertainty. Initially, half of the allowances are allocated through auction and half through free distribution, with the share being auctioned gradually increasing to 100 percent over 25 years. The system provides for linkage with emission reduction credit projects in other countries, harmonization over time with effective cap-and-trade systems in other countries and regions, and appropriate linkage with actions taken in other countries, in order to establish a level playing field among domestically produced and imported products.

THESE TWO IMPORTANT VALUES?

Government, Harvard University. Comments may be directed to the authors