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Environmental & Natural Resource Economics

Economics > Environmental & Natural Resource Economics
Table of Contents Abstract Keywords Overview Applications Discourse Conclusion Terms & Concepts Bibliography Suggested Reading

Overview
Extent of the Environmental Issues Humankind is leaving an irreversible footprint on the face of the home we call earth. Economic growth, population expansion, financial incentives, entitlement, ignorance, greed, prosperity and consumption are but a few of the contributing factors to the crisis we now face. Companies enjoying economic growth, financial gain and prosperity are threatened not only by vocal environmentalists, but by their own consciences; recognizing that they are degrading the social welfare and are ethically responsible to mitigate the damage they are causing. Delayed action means a decreasing quality of life for the population. The United States, closely followed by China, is a major contributor to the worlds environmental concerns. We must come face to face with the ramifications of ignoring our actions, economically painful though they may be. For many years already, economic development models have placed insufficient focus on environmental integrity and committed too few resources to incorporating natural resource support as a component of the same. Green House Gases A Critical Resource in Danger The Greenhouse Effect, warming of the air near the earths surface, is a serious concern to the survival of the planet. Researches portend frightening increases in temperature, a key measure crucial to our very future. Although a good number of greenhouse gases are produced naturally, the dramatic increase in global average air temperature over the last 100 years is reported in the literature as being the direct result of human activities such as industrial activities, human consumption activities and tropical deforestation. Are we spending the worlds natural capital in unsustainable ways? The answer is yes, according to the Millenium Ecosystem Assessment prepared by the Organization for Economic Development (OECD) for the United Nations secretary-general. The report concluded that over the last 50 years, humans have changed the worlds ecosystems more rapidly and extensively than at any comparable period in history. And its only going to get worse. The International Energy Agency estimates that

Abstract
This article focuses on the complex interface between economic forces and social responsibility, in particular highlighting environmental resources: Products of value to the whole, as opposed to the individual. Natural resources, once considered limitless, face rapid depletion of substantial proportion as the roller coaster of economic growth careens toward losses too great for the world to sustain. Businesses, like people, care most about things that directly impact their well-being, and they have less interest in things not directly affecting them. By nature, self-interest often supersedes what is right for the greater good. Air, water and soil, all natural resources, are considered environmental capital, even though they may not fit the conventional accounting definition of such. Because natural resources, like air and water, are owned by everyone, a conflict develops between our natural desire to meet self-needs and the expectation to incorporate common goals for all. The reader of this essay will see, paradoxically, that the markets economic growth relies on consumption and trade but contributes mightily to the destruction of our natural resources. Environmental resources improve humankinds wellbeing, but over-consumption and its by-products levy hefty costs to the environment.

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Enviormental and Natural Resource Economica

Essay by Nancy Sprague

Keywords
Cap-and-trade Carbon Dioxide Clean Air Act Climate Exchange Commodities Consumption Emissions Emissions Controls Environmental Resources Environmentalist Externalities Global Warming Green House Effect Green House Gases Market Failure Natural Resources Pollution China will overtake the U.S. as the major source of greenhouse gases by the end of the decade, (Barnes, 2007).

failure occurs, governmental intervention is commonly the route taken to improvement. Emitting pollutants is not against the law unless governmental regulation is set in place to make it so. Decreasing emissions per unit output is likely to cost the producer handsomely; business sense tells the company to continue financially-beneficial production without emissions improvements until a sanction or incentive is imposed. Economic Realities in Business Companies understand their demand curve; how much of their product will be purchased at a given price. Every economist and business manager understands the relationship of cost to demand for product. Lower cost equals higher demand; conversely an increased price of a product leads to lower public demand. People find they can live with less of something when the price becomes too high for their pocketbooks comfort. Consumption and cost of public goods (commodities) behave differently than services and products regulated by standard market and economic behaviors. Purchasers of oil, for example, are not consistently responsive to increased cost, sometimes because they cant decrease their use (e.g. oil consumption is crucial to their survival) or because they are not impacted dramatically enough to make a behavior change. So how do companies decide when and how to respond to emissions mandates in the most financially beneficial manner? Facing costly improvements to aging facilities is a concern for organizations, especially those with tight margins already. It is a difficult ethical and financial quandary at the very least. Said Nobel Laureate Eric Maskin, in an article highlighting his work on mechanism design theory, Classical economic theory assumes buyers and sellers have complete knowledge of the available alternatives and therefore can make logical informed decisions. But in fact thats often not the case, (Maskin, 2007). Paul Ormerod, author of Why Things Fayl, comments that companies which use large amounts of energy and which participate in {the} trading scheme realize that they can make mistakes about their knowledge of how their own costs evolve (Ormerod, 2005). Herein lays the obvious truth that companies are challenged in their ability to identify the monetary expenditure required to increase their production per unit in the face of mandated emissions controls. The decision to increase production, lets say for an oil-producing corporation, may result in diseconomies of scale when the cost of production per unit (including permit costs) advances upward, surpassing the point at which maximum economies have been recognized.

Applications
Economics & Externalities Growth and production spell economic success; market activity strengthens the countrys gross productivity. Growth of product in the market is typically assumed to enhance social welfare; however, society cannot disregard the destructive impact that increasing productivity is having on our ecology. Market transactions assume that the buyer and seller are both better off financially and socially when a mutually-acceptable transaction has occurred. Believing that greater oil production and consumption is beneficial to both the seller and the consumer is short-sighted; we must consider the environmental impact of the transaction. The harm caused by such a transaction pollution impacts more than just the two parties involved in the exchange. The economic term externality refers to the damage (cost) caused by any market transaction. When externalities occur, and unfortunately they are common, the outcome is considered a market failure. Put simply, the transaction itself does not meet the criteria for enhancing social welfare; it is a humandriven transaction which causes harm to others. When market

Discourse
Increased operating costs related to aging facilities, in combination with increasingly stringent regulatory mandates can lead to expensive capital upgrades. The challenge to corporations is to determine the optimal time to make these capital investments and to a certain extent make their best guess at uncertain future emissions mandates, which undoubtedly will become more strinPage 2

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Enviormental and Natural Resource Economica

Essay by Nancy Sprague

gent as social concerns grow. Cost and profit associated with continued production in an aging facility, including upgrading or retrofitting the facility to mitigate environmental impact may not be well understood. The polluting conditions creating liability for some companies are difficult to place a price on; professionals are required to use their best discretion and business experience when reporting such liabilities. Historical Perspective In the 1970s, a number of pollution-emitting companies were grandfathered an exemption to the Clean Air Act (legislation that was passed to ramp up controls on pollution sources). Further expansion on the improvements related to this act will follow later in this essay. The incentive inherent in this grandfather clause allowed companies to expand, improve, and in fact increase production of product and pollution. Relatively speaking, it may be easier for a company to identify the costs it will incur when implementing improvements to decrease emissions; it is proven much more difficult for this same organization to identify the costs impacting others as a result of its actions, especially when costs are not measured in terms of dollars. Governmental Response to Emissions Command & Control Incentives affect the means people use to achieve a goal. Implementing incentives like the Clean Air Act was the governments reply to growing levels of air pollution in the 1970s. This cap and trade initiative offers a company an emissions permit the value of which is neither a monetary fine nor cash incentive, but a delineated amount of specific pollutants that a company can emit. The company has the option to sell its permits to other organizations; in this manner the seller is able to continue producing at current levels without having to invest in costly facility improvements. The company is effectively putting a cap on its current productivity and presumably offering polluting capacity to another organization to enjoy higher production capacity. Companies emitting the highly worrisome gas, sulfur dioxide (the cause of acid rain), employ the cap and trade system now; the long-term goal of this initiative is gradual reduction of permits available over time, thereby decreasing emissions, an improvement over maintaining the steady state. The incentive instruments do lead to lower social costs, however companies take a greater financial hit because they are paying for the cost of abating the pollutants as well as paying a fee for ongoing pollution activity. Unless abatement costs, those that provide for existing infrastructure upgrades, are lower than pollution fines levied against emissions, abatement will be a second choice for the polluters. Economic Impact of the Cap-and-Trade System In a cap-and-trade system, companies or entities that release more carbon emissions into the atmosphere than their allotment allows can buy credits from companies or entities that release fewer than their allowed amount of emissions. J. Drake Hamilton, the science policy director of St. Paul-based environmental

group Fresh Energy, is a member of the cap-and-trade subgroup. Hamilton said a cap-and-trade system puts a price on carbon that can be traded in the marketplace. What I especially like about it is that it lets the market kick in, Hamilton said. Ultimately, the Commerce Department will assemble the groups work into a report to the Legislature due Feb. 1, 2008 (Shaw, 2007). Cap-and-trade is touted by some as the key to maximizing emission reductions while minimizing economic disruption. The House Energy and Commerce Committee are responsible for determining the allocation of caps-and-trades. Judith McNeill and Jeremy Williams of U21 Global in Singapore submitted a working paper series, excerpts from which follow, expanding on carbon emission permits and the premises by which these mechanisms are likely to be successful. Putting aside theoretical difference, we {McNeill and Williams} believe the McKibbin-Wilcoxen scheme has many good features, not least of which is the potential for business to manage policy risk through the purchase or gift of long term permits to emit carbon, thus lowering the cost of capital and encouraging investment in low carbon alternatives. The long term permits also offer a capacity to compensation impacts of a carbon price. The scheme also handles the difficult question of international competitiveness in a way that retains the incentive to invest in low carbon technologies. It also incorporates some sound policy design principles such as gradualism, adaptability and microflexibility (among other features as recommended by ecological economists) (McNeill, 2007). Opposing Views to Cap & Trade Initiatives Some economists and financial managers vocally oppose the cap-and-trade recommendations of the Federal Government; concerns abound relating to clarity, enforcement, artificial markets and potential for untoward financial gain. There are predictions that those who are on the front end of developing a market for carbon trading will be the winners financially from this inevitable and controversial debacle. Quoting an article from Human Events, some consider this argument sound: This system, which may sound market-friendly, is something only a bureaucrat could dream up. The twist is that the carbon market exists only because the governments imposition of a cap creates an artificial scarcity in the right to produce energy. In a cap-and-trade system, buyers will purchase their offsets from a broker or through an electronic trading platform. In Europe, carbon trading is already a reality. Since 2005, carbon offsets have been traded electronically on the European Climate Exchange (Barnes, 2007). In summation the author predicts: Whatever its impact on the environment, the cap-and-trade carbon scheme is sure to boost the economic and political prospects of people and groups that are behind it. Before the company collapsed under the weight of financial scandal, Enron under CEO Ken Lay was a key proponent of the cap-and-trade idea. So was BPs Lord John Browne, before he resigned last May under a cloud of personal scandal. In August 1997, Lay and Browne
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Enviormental and Natural Resource Economica

Essay by Nancy Sprague

met with President Bill Clinton and Vice President Gore in the Oval Office to develop administration positions for the Kyoto negotiations that resulted in an international treaty to regulate greenhouse gas emissions (Barnes, 2007). In closing, the Barnes article follows with: But the President is unwilling to call for mandatory nationwide emissions rules and instead favors voluntary carbon-emission cuts in the private sector. This is deeply frustrating to all the brokers, wheeler-dealers and interest groups that want to jump on the cap-and-trade bandwagon. There are billions of dollars to be made in trading emissions credits. But first the federal government must force everyone to play the game (Barnes, 2007). Case Study: Governmental Controls California Governor Arnold Schwarzenegger (R.) has signed into law the first state-wide, cap-and-trade program for controlling greenhouse gas emissions. The law will cap the states emissions at 1990 levels by 2020, an estimated 25% reduction. Facilities will be given emission allowances and be allowed to buy or sell surplus credits. The California Chamber of Commerce (Sacramento) opposes the bill, saying it will hurt the economy, and not help the environment. The Global Warming Solutions Act also sets up an emissions reporting system to enforce the law, which will be administered through the state-run California Air Resources Board (Sacramento). Schwarzenegger said in an interview with the Miami Herald that the state hopes the federal government will follow suit with a nationwide greenhouse gas emissions cap-and-trade program (Sissell, 2007). Designing Exchange a Market-Based Mechanism for Climate

involved in emissions trading are associated with each other in a collaborative mode, while the more punitive model tends to push companies into a silo position; responding independently to monetary fines. To that same end, companies subject to emissions penalties are likely to try and purchase more permits to produce. In this essays earlier review of economic theory, the natural response to greater demand will concurrently drive up the price of the permits.

Conclusion
The worlds economy becomes increasingly interconnected every day; the very nature of globalization leads to growth in production and consumption. Decisions to decrease overall pollution by regulation or controlling current levels through capand-trade or market trading are made by society. Planning for and participating in emissions control is the job of the companies who are involved. Complex economic and social decisions in the context of planning for our future will be the challenge for this generation and many more to come.

Terms & Concepts

Cap and Trade: An improvement method used to control pollution by providing economic incentives to producers for reducing their emissions of pollutants. Carbon Dioxide: A greenhouse gas generated naturally and by human activity such as the combustion of fossil fuels; carbon dioxide is a Greenhouse Gas. Climate Exchange: Greenhouse Gas emissions allowance trading system. Emissions Controls: Technologies employed to reduce emissions pollution. Global Warming: Refers to increasing temperatures of ocean water and air nearest the surface of the earth. Green House Gases: Atmospheric gases (natural or produced by humans) that contribute to the Greenhouse Effect. Green House Effect: The natural process by which the suns heat is captured in the atmosphere closest to the earth, thus maintaining the temperature of the earths surface. The gases that capture and retain the heat, (greenhouse gases) include naturally occurring gases as well as manufacturing byproducts such as carbon dioxide, methane, and nitrous oxide.

The Chicago Climate Exchange (CCX) is a voluntary greenhouse gas reduction system. Companies participating with CCX benefit from the independent verification statistics the organization can offer. The exchange quantifies for participants their emissions of greenhouse gases, and like the governmental cap and trade system, trades greenhouse gas allowances. By joining, participating organizations commit to reducing their aggregate emissions by 6% by 2010. Today, with 300 members from multiple business sectors and emissions-offset projects around the world, CCX, along with the electronic, transparent trading concepts it has successfully extended into the emissions marketplace, is still very much in its infancy. Sandor {of CCX) has seen beginnings before. As an economics professor at University of California at Berkeley, Sandor thought up interest-rate futures as a way for banks and investors to hedge against possible shifts in rates (Magee, 2007). The Best Answer? Is it Governmental or Market Controls Emissions controls driven by the market, as opposed to governmental command and control systems, are likely a less costly means to the same end decreased emissions. Companies

Bibliography
Barnes, P. (2007). Environmental update. Business & Economic Review, 54(1), 26-27. Retrieved November 7, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=tru e&db=buh&AN=26906540&site=ehost-live
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Enviormental and Natural Resource Economica

Essay by Nancy Sprague

Magee, J. (2007). Exchanges for climate change. Securities Industry News, 19(29), 1-21. Retrieved November 11, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=tru e&db=buh&AN=26317372&site=ehost-live Maskin, E. (2007). A new Nobel laureate explains his pathbreaking work. njbiz, 20(44), 15-15. Retrieved November 10, 2007, EBSCO Online Database Regional Business News. http://search.ebscohost.com/login.aspx?direct=true &db=bwh&AN=27249226&site=ehost-live McNeill, J., & Williams, J. (2007). The economics of climate change: An examination of the McKibbin-Wilcoxen hybrid proposal for a carbon price for Australia. U21Global Working Papers Series, (5), 2-19. Retrieved November 10, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/ login.aspx?direct=true&db=bth&AN=25218966&site=eh ost-live Ormerod, P. (2005). Why most things fayl. Evolution, extinction and economics. Great Britain: Pantheon BooksRandom House. Shaw, C. (2007, October 6). Capping and trading carbon. Finance & Commerce (Minneapolis, MN). Retrieved November 10, 2007, EBSCO Online Database Regional Business News. http://search.ebscohost.com/login.aspx? direct=true&db=bwh&AN=L54260081FACO&site=ehos t-live

Sissell, K. (2006). California becomes first state to cap greenhouse gases. Chemical Week, 168(33), 53-53. Retrieved November 10, 2007, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/ login.aspx?direct=true&db=aph&AN=22811893&site=eh ost-live

Suggested Reading
Lambro, D. (2007, October 9). Obamas green goals aim to slash carbon emissions. Washington Times, The (DC), A04. Retrieved November 11, 2007, from EBSCO Online Database Regional Business News. http://search.ebscohost.com/login.aspx?direct=true&db=bwh&AN=4KB520 071009030039001&site=ehost-live Moorman, R. (2007). Selling green. Air Cargo World, 97(8), 10-11. Retrieved November 11, 2007, from EBSCO Online Database Business Source Premier. http://search.ebscohost.com/login.aspx?direct=true&db=buh&AN=26222536 &site=ehost-live Reinelt, P., & Keith, D. (2007). Carbon capture retrofits and the cost of regulatory uncertainty. Energy Journal, 28(4), 101-127. Retrieved November 7, 2007, from EBSCO Online Database Academic Search Premier. http://search. ebscohost.com/login.aspx?direct=true&db=aph&AN=270 15556&site=ehost-live Where things stand. (2007). PA Times, 30(1), 13. Retrieved November 7, 2007, from EBSCO Online Business Source Premier. http://search.ebscohost.com/login.aspx?direct=tru e&db=buh&AN=23840725&site=ehost-live

Essay by Nancy Sprague

Nancy Sprague holds a BS degree from the University of New Hampshire and a Masters Degree in Health Policy from Dartmouth Colleges Center for the Evaluative and Clinical Sciences. Nancy began her career in health care as a registered nurse for many years. Since earning her undergraduate degree in Business, Nancy has worked in private medical practice, home health, consulting, and most currently as an administrator for a non-profit, academic medical center. Her operational experience as a business manager in private medical practice and for the last decade in a tertiary medical center have allowed Nancy broad insight into both for-profit and non-profit sectors.
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