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The economy and the environment are inextricably linked.

Environment
Key environmental services Environmental impacts of economic activities

Economy y

economicsystemoperateswithina naturalenvironmenthenceisshownas beingencapsulatedbyit economicactivitydependsuponthe environmentforanumberofkey services economicactivitiescan,inturn,impact uponcapacityofenvironmentto providetheseservices

The environment or nature shapes economic decisions and economic decisions, in turn, shape nature.

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Bytheeconomywerefertothepopulationofeconomic agents,theinstitutionstheyformandtheinterlinkages betweenagentsandinstitutions. Wecansimplifytheeconomyintotwosectors:production andconsumption.

goods and services

Production
(+ ) factors of production

Consumption
(+ )

Exchangesofgoodsandservicesaswellasfactorsof productiontakeplacebetweenthetwosectors,generating humanwellbeing(+).

Bytheenvironmentwemeanthegeosphere,the atmosphere,thehydrosphereandthebiosphere. Ourdefinitionincludesalllifeforms,energyand materialresources,allecosystems,thelithosphere, thestratosphere,thetroposphere,etc. Constituentpartsofenvironmentinteractwitheach other:changesincompositionofatmosphereaffect compositionofbiospherewhilechangesin compositionofbiosphereaffectcompositionof lithosphere,etc.

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goods and services

Production

Consumption
factor s of pr oduction

Resource supplier l Wastesink

E1 Reso ur ce Su pp lier

E2 Waste Sink

Amenity y
E3 Amenity E4 Life-sup por t

Lifesupport

Environmentsuppliesnaturalresources(energyand materialresources)whichareusedas primary t i l ) hi h d i inputstoproduction. Naturalresourcescharacterizedasflow orstock resourcesdistinctionliesinwhetherlevelof currentresourceuseaffectsfutureavailability.

flowresources:nolinkbetweencurrentuseandfuture availability(energyfromthesun,waveandwindpower). stock resources:currentuseaffectsfutureavailability
nonrenewable renewable

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Nonrenewable resources:oilundertheground, minerals,etc. i l t

Nonrenewable resourcesdonotgrowhenceapositive harvestratealwaysexceedsgrowthrateandresource stockfallswithextraction

Renewableresources:coastalandoceanfisheries, forests,geneticresourcesintropicalrainforests,etc.
Renewable resourcesgrowbutwhetheraresourcestock risesorfallsdependsuponwhetherharvestrateisloweror higherthannaturalregenerativerateofresource

ifharvestingexcessive,humaneconomicactivitycan humaneconomicactivitycan damageresourcesupplierfunctionofenvironment, damageresourcesupplierfunctionofenvironment sometimesirreversiblyasincaseofspeciesextinction bl f tellsusthatifprevailingeconomicinstitutionsresultin excessiveuse,thenuseofrenewableresourcesneedtobe managedinaneconomicsystem

Use and management of renewable resources is a g major topic of study in environmental economics.
Focus is on sustainable use, ie., identifying maximum sustainable yields so as to ensure optimal growth of resources.

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Productionsectorextractsenergyresourcessuchasoiland materialresourcessuchasironorefromtheenvironment andtheseresourcesaretransformedintooutputs. Allgoodsandservicesarederivedfrommaterialswiththe applicationofenergyinputs;producedgoodsandservices, embodyingaportionofthesematerialsandenergy,flowto consumers,generatingwellbeing. Productionofoutputfromenergyandmaterialinputsresults P d ti f t tf d t i li t lt inusefuloutputbutitalsoresultsintheoutputofwaste products.

Anunintendedbyproductofproductionisthedischargeof solid,liquidandgaseouswastesintoenvironmentalmedia. solid liquidandgaseouswastesintoenvironmentalmedia Wastesresultfromconsumptionactivitiestoo:when individualsputouttheirgarbageorwhentheydrivetowork, theydischargewasteresidualsasabyproductoftheir consumptionactivity. Wastesincludealltypesofresidualsdischargedintotheair orwaterordisposedofonlandsuchasSO2,VOC,toxic t di d f l d h SO VOC t i solvents,animalmanure,pesticides,PM,heavymetals,solid wasteaswellaswasteenergyintheformofheatand radioactivity.

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Energyandmaterialresourcesaredrawnfromthe environment,usedforproductionandconsumption activitiesandarereturned(inalteredform)tothe environmentaswastes. Asecondkeyserviceoftheenvironmentisthe provisionofasinkforwasteresidualsarisingfrom i i f i kf t id l i i f theeconomicactivitiesofextraction,production andconsumption.

Relationshipbetweenresidualsdischargedintothe environmentandenvironmentaldamagesis,not i t d i t ld i t surprisingly,acomplexrelationship.Wewilldiscuss thisrelationshipinmoredetailwhenwestudy environmentalqualitymodels. Fornow,notethattheenvironmentdoeshavea p y capabilitytotakewastesandconvertthembackto harmlessorecologicallyusefulproducts.

Wecallthiscapabilitytheenvironments assimilativecapacity. assimilativecapacity.

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WP

WC

E2 Waste Sink

A
W < A no pollution A preserved W > A pollution p possible damage to A g A = assimilitative capacity of waste sink W = WP + WC = production and consumption waste residuals

Assimilativecapacityoftheenvironmentto transformwastestoharmlessproductsderives fromavarietyof environmentaltransformation fromavarietyofenvironmentaltransformation processes physical,chemical,biological, hydrologicalandmeteorologicalprocesses Ifwedisposeofwastesinquantitiesandqualities whichdonotexceedenvironmentsassimilative capacity (W<A),pollutionproblemsdonotarise andwasteassimilatorfunctionofenvironmentis p preserved. Pollutionproblemsarisewhenwasteresiduals dischargedexceedassimilativecapacityof environmenttobreakdownresiduals(W>A).

Wasteresidualsthatcanbefullyorquicklybroken downbyenvironmentaltransformationprocesses f intoharmlesssubstancesareclassifiedasnon cumulativeorflowpollutants theseresidualsdo notaccumulateintheenvironment.

organiceffluentsdischargedintoahealthylakewillbe g g y biologicallyorchemicallyprocessedbythewaterbody itself bytheactionofmicroorganismsoroxidation intotheir(harmless)chemicalcomponentparts.

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Forsomewasteresidualsdischargedintotheenvironment, therearenonaturalprocessestotransformtheminto th t l t t f th i t harmless,orlessharmful,substances

Perfectlypersistentcumulative(stock)pollutantsincludemetalssuch asleadandcadmiumandmanmadesubstancessuchasPCBsand DDT.IfPCBsaredischargedintothewater,thentheywillnotbe brokendownbytheactionofmicroorganismsoroxidationrather theywillaccumulateinthewaterbody.

Mostpollutantsareimperfectlypersistentcumulative pollutants
shortlivedstockpollutantshavehighdecayratesandlonglivedstock pollutantshavelowdecayrates;CH4 12years,NOX 114years,CO2 5 200years

Assimilativecapacityofanenvironmental mediumtobreakdownpollutantsdepends uponanumberoffactorsincludingpastuseof mediumasawastesink.

waterbodyhaslimitedassimilativecapacityforwaste dependsuponanumberoffactorssuchastemperature ofwater,itsrateofreplacement,andthevolumeof waste(BOD)relativetothevolumeofreceivingwater asleveloforganicinputintoalakeincreases,the g p , processofbreakingitdownintoecologicallyharmless fb ki i d i l i ll h l productswilluseupmoreandmoreoftheDOinthe waterandthiswillreducetheassimilativecapacityof thewaterbody sufficientlyhighBODcandamageassimilativecapacity ofthewaterbodytotheextentthatnoncumulative pollutantscanbecomecumulativepollutants.

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theproportionofwasteresidualsassimilatedinany periodmaydependuponthecurrentpollutionload useofwastesinkservicescanaffectavailabilityand qualityoftheservice soweneedtothinkoftheassimilativecapacityofthe environmentasbeingafiniteresource

Managementofenvironmentswastesink servicesisamajortopicofstudyin environmentaleconomics. environmentaleconomics.

Theenvironmentprovideshumanswithvarious environmentalresourcesorservicesfromwhichwederive utilitydirectly.Suchresourcesorservicesarecalled amenitiesoramenityservices. Examplesofamenitiesincluderecreationalfacilitieslike wildernessareas,tropicalrainforests,orbeachesandany othersourceofaestheticenjoyment,pleasureand stimulation,ie.,utilitysuchaslandscapesorwildlife. Amenityservicesdonotgenerallyrequireproductiveactivity totransformanenvironmentalresourceintoasourceof humansatisfaction.Forexample,swimmingintheoceanor hikinginawildernessareaentaildirectuseofnaturalornon producedenvironmentalresources.

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Amenityservicesmayormaynotinvolveconsumptivematerial flow,thatis,utilitymaybederivedfromuseornonuseof amenity. i Individualsmayderiveutility

fromhikinginawildernessarea(valueattachedtowildernessarea derivesfromdirectuse) fromknowingthatthewildernessareaexistseventhoughtheydonot expecttovisitthearea(individualsattachexistenceornonusevalue towildernessarea) ANWRcontroversy

Manyindividualsvaluetheexistenceoftropicalrainforestssuchas theAmazoneventhoughtheydonotanticipatevisitingthem becausetheyvaluetheexistenceoftheecosystemitselfand/or existenceoffloraandfaunatherein

Estimatingthemonetaryvalueofanamenityisa majortopicinEnvironmentalEconomics.

Environmentprovidesbasiclifesupportservicesforhumans (ecosystemservices).Globalandlocallife supportservices (ecosystemservices).Globalandlocallifesupportservices generallyinvolvebiogeochemicalcycles,pathwaysbywhich chemicalelementsormoleculesmovethroughbiotic (biosphere)andabiotic (lithosphere,atmosphere, hydrosphere)spheresofEarth:

i.

maintenanceofanatmosphericcompositionsuitableforlife (nitrogenandoxygencycles) ii. ii maintenanceoftemperatureandclimate (carboncycle) iii. stratospherefiltrationofpotentiallyharmfulsolarradiation (ozoneoxygencycle) iv. recyclingofwater,nutrients,etc.(hydrologic,nitrogenand phosphoruscycles)

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Threeservicesoftheenvironment(E1,E2,E3)drawnas overlappingcirclescontainedwithinallencompassing pp g p g boundaryE4 andeconomyisinterlinkedwithall4services. TwoheadeddashedarrowlinebetweenE2 andE4 indicates thatwasteresidualdischargescanimpactlifesupport servicesandthatchangesinlifesupportservicescanimpact assimilativecapacityofenvironment. ArrowsbetweenE4 andproductionandconsumptionsectors showdirectandindirectfeedbackeffectsbetweeneconomy andlife supportservicesandvice versa. andlifesupportservicesandviceversa. Key environmental services are inextricably interlinked with each other and with the economy hence how we use one environmental service in the economy impacts on the quality and availability of that service as well as other services. services.

Wecanusealakeas: aresourcesupplier fishinthelakearerenewableresources awastesink(afreeinputtoproduction)anddischargewasteresiduals inthelake,enablingustoproducegoodsmorecheaplyandhence producemoregoods(+) asourceofamenity swimming,sailing,recreationalfishing asupplieroflifesupportservices hydrologic andnutrientcycles Thereis,however,potentialconflictintheseuses: Ifeffluentsdischargedexceedthelakesassimilativecapacity,BODin lakewillriseandlevelofDOwillfallimpactingbiogeochemicalcycles. AslevelofDOfalls,microorganismsinlakewillbegintodie,lowering waterqualityanddamagingwasteassimilator, amenity andlifesupport servicesprovidedbylake:waterwillbecomeunsafefordrinking,then swimming,thenfishing. IfDOlevelfallsbelowminimumlevelofDOtosustainfishlife,fishwill die,damagingtheresourcesupplierfunctionoftheenvironment.

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Tropicalrainforestsoftheseaprovideamenityservicesto snorkelersandscubadiversaswellastoindividualswhovaluethe existenceofcoralreefs i f l f Alsoproviderichcoastalfishinggrounds(resourcesupplier)for commercialaswellasrecreationalfishers(amenity) Ifacoastalfishinggroundisoverfished,thepopulationoffeeder fishfallsdamagingresourcesupplierserviceaswellasrecreational fisheramenity service. Feederfishacriticalcomponentofnutrientcycleandperforma criticalwasteassimilatorservice theyfeedonalgaegrowingon coralreefsenablingcoraltobreatheandgrow.As coralreefsenablingcoraltobreatheandgrow As populationof fishfalls,thewasteassimilatorserviceprovidedbythefishis damagedandalgaeonthecoralreefwillgrowexcessively, chokingand,ultimately,killingthecoralreef. Damagetofishhabitatwill,inturn,leadtoafurtherfallinthefish populationdamagingtheresourcesupplier, amenity,wastesink andlifesupport servicesofthecoastalfishingground.

resourcesupplier resourcesupplier floraandfaunainforestarerenewable resources,sourceoftimberandmyriadgeneticresources, , y g , manywithpotentialmedicinalproperties provideswastesink wastesinkservicesasacarbonsink providesamenity servicestousers(wilderness,floraand amenity faunaaredirectlyenjoyedbyhikers,birdwatchers,etc.)and nonusers(individualswhovaluetheexistenceoftheforests and/orthespecieslivingwithintheforest). ecosystemservices ecosystemservicesuponwhichthelifeofitsinhabitants dependsuchasarichhabitatformanyfloraandfauna,soil stabilization,watershedpurification,andtheregulationof streamflow Ifweexcessivelyharvestthetreestoproducemoregoods (+),wewilldamagetheresourcesupplierfunctionofthe forest()andtheotherenvironmentalservicesprovidedby theforest().

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Illustratesfourkeycharacteristicsofenvironmentalassets:
1. 2.

Environmentalassetsarecompositeassets provideavarietyofservices compositeassets compositeassets Servicesprovidedbyenvironmentalassetsareeconomicservices each servicehasapositiveeconomicvalue positiveeconomicvalue

wheneverindividualsderiveutilityfromsomethingthentheyhaveapositiveWTPforthat something(preferencesamonetaryindicatorofWTP) ifwecouldbuyorsellthese functionsinamarket,theywouldtradeatapositiveprice bottomline therewouldbenoeconomicactivityintheabsenceofthesefunctionshence thesefunctionsarerightlyreferredtoastheeconomicfunctionsoftheenvironment

3.

Differentusesofenvironmentalassetsoftenindirectconflictwitheach other conflictinguses usingtheenvironmentforonepurposecan conflictinguses reduceitsabilitytosupplyuswithotherservices Environmentalassetsarefiniteorscarceandexpendableresources scarceandexpendableresources implicationofLawsofThermodynamics(mattercannotbecreatedor destroyedandconservationofmatterdecreasingovertime)since environmenteconomicsystemaclosedsystem

4.

MaterialBalancemodelshowsusthattheenvironmentitselfisa scarce,expendable,valuable,composite resource withmany scarce expendable valuable composite conflicting demands onitandthathowweuseandmanageour environmentwillimpacteconomicgrowth. Modelidentifiesthateconomicshasanimportantroletoplayin helpingustounderstandhowbesttouseandmanageourglobal environment. Economicsisadisciplineconcernedwithallocatingscarce resourcestoconflictingdemands. EnvironmentalEconomics,likeeconomicsingeneral,isconcerned withtheallocation,distributionanduseofscarceresourcesbut i h h ll i di ib i d f b thefocusisonenvironmentalresources.
Environmentalresourcesare,inmanyways,fundamentallydifferent from(private)goodsgenerallystudiedineconomicsandhencethe natureoftheseresourcesmustbeaccountedforwhenstudyingthe allocation,distributionanduseoftheseresources.

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i.

explainanthropogeniccausesofenvironmentaldegradation theoriesofmarketfailure(externalities publicgoods commonproperty theoriesofmarketfailure(externalities,publicgoods,commonproperty resources)

ii. valuenature theoryandpracticeofenvironmentalbenefitmeasurement indirectanddirectvaluationmethodologiestodeterminetherelative (monetary)valuesthatpeopleplaceondifferentenvironmental outcomes valuesusedincostbenefitanalysis,standardsetting,damage assessment,etc.

iii.

determinesociallyacceptablelevelofenvironmentalquality identifytradeoffbetweenbenefitsandcostsofabatement(Pareto efficiency) designsolutionsforenvironmentaldegradation environmentalpolicydesignandinstrumentchoice

iv.

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