The seventh edition of Economics of the Environment: Selected Readings has just been published by Edward Elgar Publishing, and I’m pleased to bring this new volume to your attention. The book is a compendium of some of the best and most timely articles by a dream team of environmental economists. Previous editions have served as a valuable supplement to environmental economics text books or as a stand-alone reference book of key, up-to-date readings from the field. In addition to being valuable for anyone studying environmental economics, environmental policy, or climate change policy, the book can be a useful resource for practitioners in government, private industry, as well as advocacy groups and other NGOs working on environmental policy.
In today’s essay, I first describe the background and motivation for the book, summarize its contents – chapter by chapter, highlight its key messages, and then conclude with some reflections and an invitation.
Background and Motivation
Environmental and natural resource problems are both more widespread and more important today than they were 100 years ago when the discipline of modern economics was marking its emergence with the publication of the first volume of the American Economic Review. A century of economic growth and globalization have brought unparalleled improvements in societal well-being, but also unprecedented challenges to the carrying capacity of the planet. Increases in income and population that would have been inconceivable 100 years ago have greatly heightened pressures on the natural environment.
The stocks of a variety of renewable natural resources – including water, forests, fisheries, and numerous other species of plant and animal – have been depleted below socially-efficient levels, principally because of market failures. Open-access – whether characterized as externalities or public goods – have led to the degradation of air and water quality, inappropriate disposal of hazardous waste, depletion of stratospheric ozone, and the atmospheric accumulation of greenhouse gases linked with global climate change.
Over the same century, economics as a discipline has gradually come to focus more and more attention on these problems, first considering natural resources and subsequently environmental quality. Economic research within academia and think tanks has improved our understanding of the causes and consequences of excessive resource depletion and inefficient environmental degradation, and thereby has helped identify sensible policy solutions.
Despite the generally positive influence economics has had on policy, the problems have overall not diminished, and the lag between understanding and action can be long. While some environmental problems have been addressed successfully, others continue to emerge. Some, such as the threat of global climate change, are both more consequential and more difficult than problems of the past. Fortunately, economics is well positioned to offer better understanding and better policies to address these new and ongoing challenges.
Approximately six years have passed since the previous edition of this volume was published, and it is now close to 50 years since the first edition appeared in 1972, edited by Robert and Nancy Dorfman. I have had the pleasure of editing the fourth (2000), fifth (2005), sixth (2012), and now the seventh edition (2019) of this book. Whereas the first six editions were published by W.W. Norton & Company, the new edition has been published by Edward Elgar Publishing Limited.
Over this span of time, environmental economics has evolved from what was once a relatively obscure application of welfare economics to a prominent field of economics in its own right. The number of articles on the natural environment appearing in mainstream economics periodicals has continued to increase, as has the number of economics journals dedicated exclusively to environmental and resource topics.
There has also been a proliferation of environmental economics textbooks. Many are excellent, but none can be expected to provide direct access to timely and original contributions by the field’s leading scholars. As most teachers of economics recognize, it is valuable to supplement the structure and rigor of a text with original readings from the literature.
With that in mind, this new volume consists of 34 chapters that instructors will find to be of tremendous value as a complement to their chosen text and their lectures. The scope is comprehensive, the list of authors is a veritable “who’s who” of environmental economics, and the articles are timely, with more than 94 percent published since 1990, and well more than a third published over the past five years. Overall, more than half of the chapters are new to this edition.
In order to make these readings broadly accessible, one criterion I used in the selection process is that articles should not only be original and well written – and meet the highest standards of economic scholarship – but also be non-technical in their presentations. Hence, readers will find little or no formal mathematics in the book’s 688 pages.
The 34 chapters are grouped into nine parts of the book: (1) Overview; (2) Costs and Benefits of Environmental Protection; (3) Assessing the Goals of Environmental Policy: Economic Efficiency and Benefit-Cost Analysis; (4) The Means of Environmental Policy: Cost-Effectiveness and Market-Based Instruments; (5) Economics of Natural Resources; (6) Global Climate Change; (7) Sustainability, the Commons, and Globalization; (8) Behavioral Economics and the Environment; and (9) Economics and Environmental Policy Making.
Part I of the volume provides an overview of the field and a review of its foundations. Don Fullerton and I (Chapter 1) start things off with a brief essay about how economists think about the environment. This is followed by the classic treatment of social costs and bargaining by Ronald Coase (Chapter 2).
Costs and Benefits of Environmental Protection
Part II examines the costs and benefits of environmental protection. It begins with an article by Antoine Dechezleprêtre and Misato Sato (Chapter 3) that examines an often-controversial area, namely the theory and empirical evidence regarding the relationship between environmental regulation and so-called “competitiveness.” The remainder of Part II focuses on the other, more challenging side of the analytic ledger – the benefits of environmental protection. This is an area that has been even more contentious, both in the policy world and among scholars. Here the core question is whether and how environmental amenities can be valued in economic terms for analytical purposes. Trudy Cameron (Chapter 4) provides a valuable guide to a concept that is both important in assessments of the benefits of environmental regulations and is also widely misunderstood – the value of a statistical life. Then we turn to a provocative debate on the stated-preference method known as “contingent valuation,” including two supportive essays – by Richard Carson (Chapter 5) and by Catherine Kling, Daniel Phaneuf, and Jinhua Zhao (Chapter 6) – followed by a critique by Jerry Hausman (Chapter 7).
Assessing the Goals of Environmental Policy: Economic Efficiency and Benefit-Cost Analysis
There are two principal policy questions that need to be addressed in the environmental realm: how much environmental protection is desirable; and how should that degree of environmental protection be achieved?
In Part III, the criterion of economic efficiency and the analytical tool of benefit–cost (net present value) analysis are considered as ways of assessing the goals of environmental policies. In an introductory essay, Kenneth Arrow and his co-authors (Chapter 8) ask whether there is a role for such analysis to play in environmental, health, and safety regulation. Then, Lawrence Goulder and I (Chapter 9) focus on a key ingredient of benefit–cost analysis that non-economists often find confusing or even troubling – intertemporal discounting. Next, Kenneth Arrow and another set of co-authors (Chapter 10) focus on the possibility of a declining discount rate, which can be very important for analyzing long-term phenomenon, such as climate change. Finally, Ted Gayer and Kip Viscusi (Chapter 11) provide a critique of what they perceive to be the ways in which the principles of benefit–cost analysis have been abused in some regulatory impacts analyses carried out by the federal government.
The Means of Environmental Policy: Cost Effectiveness and Market-Based Instruments
Part IV examines the policy instruments – the means – that can be employed to achieve environmental targets or goals. This is an area where economists have made their greatest inroads of influence in the policy world, with tremendous changes over the past 30 years in the reception given by politicians and policy makers to so-called market-based or economic-incentive instruments for environmental protection. Richard Schmalensee and I (Chapter 12) start things off by identifying lessons that have been learned from three decades of experience with cap-and-trade systems in Europe and the United States. In the next chapter, Schmalensee and I (Chapter 13) examine the ironic history of one particularly important application – the SO2 allowance trading system, enacted by the Clean Air Act Amendments of 1990. The following article, by Karen Fisher-Vanden and Sheila Olmstead (Chapter 14), recognizes that virtually all prominent applications of emissions trading systems have been for air pollutants of various types, and examines the opportunities and challenges of using such instruments to address water quality problems.
Economics of Natural Resources
Part V consists of four essays on the economics of natural resources, beginning with Robert Solow’s classic, intuitive explication of Harold Hotelling’s seminal contribution to the economic theory of nonrenewable natural resources (Chapter 15). A natural extension is provided by Thomas Covert, Michael Greenstone, and Christopher Knittel (Chapter 16) in an article in which they ask whether market forces of supply and demand will lead to severe reductions in the use of fossil fuels. Then Sheila Olmstead (Chapter 17) applies similar thinking to the management of water resources, and Severin Borenstein (Chapter 18) examines the economics of renewable electricity generation.
Global Climate Change
The next four sections of the book treat a set of timely and important topics and problems. Part VI is dedicated to analysis of economic dimensions of global climate change, which appears to be the most significant environmental problem that has yet arisen, both in terms of its potential damages and in terms of the costs of addressing it. First, a broad overview of the topic is provided in a survey article by Joseph Aldy, Alan Krupnick, Richard Newell, Ian Parry, and William Pizer (Chapter 19). Next, William Nordhaus (Chapter 20) critiques the well-known Stern Review on the Economics of Climate Change, and Nicholas Stern and Chris Taylor (Chapter 21) respond. Following this, Richard Newell, William Pizer, and Daniel Raimi (Chapter 22) examine what was accomplished with the use of carbon markets in various parts of the world in the 15 years after the global climate agreement known as the Kyoto Protocol. Of course, after Kyoto, the next major global agreement in this realm was the landmark Paris Agreement of 2015. Daniel Bodansky, Seth Hoedl, Gilbert Metcalf, and I (Chapter 23) analyze how linking heterogeneous national policies can lower the cost of achieving national targets and thereby facilitate increased ambition under the Paris Agreement. Finally, Richard Tol (Chapter 24) turns from the cost side to the benefit side of climate policy by examining the anticipated economic impacts of unabated climate change.
Sustainability, the Commons, and Globalization
Part VII examines another important area of exploration in environmental economics: sustainability, the commons, and globalization. Robert Solow (Chapter 25) begins with an economic perspective on sustainability. This is followed by Elinor Ostrom’s development of a general framework for analyzing sustainability (Chapter 26), and my own historical view of economic analysis of problems associated with open-access resources (Chapter 27). Then, we turn to the topic of corporate social responsibility and the environment, discussion of which has too often been characterized by more heat than light. Forest Reinhardt, Richard Vietor, and I (Chapter 28) provide an economic perspective by examining the notion of firms voluntarily sacrificing profits in the social interest. The essays in the book can apply in the context of a diverse set of countries, but developing countries face a special set of challenges. So, this section closes with Michael Greenstone and Kelsey Jack (Chapter 29) providing a broad examination of the relationship between economic development and environmental protection.
Behavioral Economics and the Environment
Next, in Part VIII, we feature applications of the emerging area of behavioral economics to environmental issues, beginning with an overview of this terrain by Jason Shogren and Laura Taylor (Chapter 30). Then, Cass Sunstein and Lucia Reisch (Chapter 31) examine the implications of behavioral economics for the types of public policies that are most likely to be effective. Lastly, a specific application of behavioral economics to environmental questions is considered by Todd Gerarden, Richard Newell, and myself (Chapter 32), as we examine potential explanations for the so-called “energy paradox” or “energy efficiency gap” – the apparent reality that energy-efficiency technologies that would more than justify their upfront costs through life-cycle energy-cost savings are nevertheless not adopted.
Economics and Environmental Policy Making
The final section of the book, Part IX, departs from the normative concerns of much of the volume to examine some interesting and important questions of political economy. It turns out that an economic perspective can provide useful insights into questions that might at first seem fundamentally political. Myrick Freeman (Chapter 33) reflects on the benefits that U.S. environmental policies have brought about since the first Earth Day in 1970. And Robert Hahn (Chapter 34) addresses the question that many of the articles in this volume raise: what impact has economics actually had on environmental policy?
Preparing the various editions of this book has caused me to review hundreds of articles, and this has allowed me to identify some common themes that have emerged. First, there is the value – or at least, the potential value – of economic analysis of environmental policy. The cause of virtually all environmental problems in a market economy is economic behavior (that is, imperfect markets affected by externalities), and so economics offers a powerful lens through which to view environmental problems, and therefore a potentially effective set of analytical tools for designing and evaluating environmental policies.
A second message, connected with the first, is the specific value of benefit–cost analysis for helping to promote efficient policies. Economic efficiency ought to be one of the key criteria for evaluating proposed and existing environmental policies. Despite its limitations, benefit–cost analysis can be useful for consistently assimilating the disparate information that is pertinent to sound decision making. If properly done, it can be of considerable help to public officials when they seek to establish or assess environmental policies.
Third, the means governments use to achieve environmental objectives matter greatly. Different policy instruments have very different implications in terms of both benefits and costs, including abatement costs in both the short and the long term. Market-based instruments can enable the minimization of these costs.
Fourth, an economic perspective is also of value when reflecting on the use of natural resources, whether land, water, fisheries, or forests. Excessive rates of depletion are frequently due to the nature of the respective property-rights regimes, in particular, common property and open-access. Economic instruments – such as ITQ systems in the case of fisheries – can and have been employed to bring harvesting rates down to socially efficient levels.
Fifth and finally, policies for addressing global climate change, linked with emissions of carbon dioxide and other greenhouse gases, can benefit greatly from the application of economic thinking. On the one hand, the long time-horizon of climate change, the profound uncertainty in quantitative links between emissions and actual damages, and the possibility of catastrophic climate change present significant challenges to conventional economic analysis. But, at the same time, the ubiquity of energy generation and use in modern economies means that only market-based policies – essentially carbon-pricing regimes – are feasible instruments for achieving truly meaningful emissions reductions. Hence, despite the challenges, an economic perspective on this grandest of environmental threats is essential.
Reflections and an Invitation
Environmental economics is a rapidly evolving field. Not only do new theoretical models and improved empirical methods appear on a regular basis, but entirely new areas of investigation open up when the natural sciences indicate new concerns or the policy world turns to new issues. Therefore, this volume of collected essays remains a work in progress. I owe a great debt of gratitude to the teachers, students, and other readers of previous editions who have sent their comments and suggestions for revisions. Thanks are also due to Patrick Behrer, who provided superb research assistance in producing this Seventh Edition. Looking to future editions, I invite all readers – whether teachers, students, or practitioners – to send me your suggestions for improvement.