Ann E. Ferris, Richard Garbaccio, Alex Marten, and Ann Wolverton
Concern regarding the economic impacts of environmental regulations has been part of the public dialogue since the beginning of the U.S. EPA. Even as large improvements in environmental quality occurred, government and academia began to examine the potential consequences of regulation for economic growth and productivity. In general, early studies found measurable but not severe effects on the overall national economy. Although price increases due to regulatory requirements outweighed the stimulative effect of investments in pollution abatement, they nearly offset one another. However, these studies also highlighted potentially substantial effects on local labor markets due to the regional and industry concentration of plant closures.
More recently, a substantial body of work examined industry-specific effects of environmental regulation on the productivity of pollution-intensive firms most likely to face pollution control costs, as well as on plant location and employment decisions within firms. Most econometric-based studies found relatively small or no effect on sector-specific productivity and employment, though firms were less likely to open plants in locations subject to more stringent regulation compared to other U.S. locations. In contrast, studies that used economy-wide models to explicitly account for sectoral linkages and intertemporal effects found substantial sector-specific effects due to environmental regulation, including in sectors that were not directly regulated.
It is also possible to think about the overall impacts of environmental regulation on the economy through the lens of benefit-cost analysis. While this type of approach does not speak to how the costs of regulation are distributed across sectors, it has the advantage of explicitly weighing the benefits of environmental improvements against their costs. If benefits are greater than costs, then overall social welfare is improved. When conducting such exercises, it is important to anticipate the ways in which improvements in environmental quality may either directly improve the productivity of economic factors—such as through the increased productivity of outdoor workers—or change the composition of the economy as firms and households change their behavior. If individuals are healthier, for example, they may choose to reallocate their time between work and leisure. Although introducing a role for pollution in production and household behavior can be challenging, studies that have partially accounted for this interconnection have found substantial impacts of improvements in environmental quality on the overall economy.
This is an advance summary of a forthcoming article in the Oxford Research Encyclopedia of Environmental Science. Please check back later for the full article.
Input-Output (I-O) models were originally conceived by the Nobel Prize winner Wassily Leontief in the 1930s as a tool that can be used by economists and economic policy makers to help in their decision process. The I-O models provide a “picture” of the how the economy works, that is, what are the necessities to produce goods and services; how this production generates income, profits and taxes; and how this income is spent. In a simplified way the I-O models can be seen as the model implementation of the economy’s circular flow diagrams usually show in the introductory courses of economics.
Taking, for example, the production of computer screens:
• On the production side, the I-O models have information for the following: (a) how much is spent on the inputs, goods and services, necessary to produce the screens; (b) if these inputs have their origin from the domestic market or were imported; (c) how much was paid in tax to the government; (d) what was the total amount paid in wages and salaries; (e) what were the profits of the producing firms; (f) how many computer screens are sold in the domestic market or in the international market (exported); and (g) if they are sold directly to the final consumer or if they are used as a production input, being incorporated in other goods, for example, like a refrigerator with a computer screen.
• On the demand side, the I-O models, taking into consideration the total income received by the different players in the economy, that is, households, firms, and government, have information about the following: (a) how the income of these players is spent on goods and services, and if they are used for consumption or investment; (b) if these goods and services were produced domestically or abroad (imported); and (c) how much consumer tax was paid.
From the above structure of the I-O models, and using economic mathematical models, it is possible to measure the direct and indirect inputs needed to produce goods and services in the economy, for example, to produce a car, one does not see the need for agricultural goods as a direct input for production, but the fabric used in the car seats or on the car carpets could have come from cotton, which is an agricultural good; as so, cotton is an indirect input used in car production.
The I-O models, by their capability to show a complete picture of the economic system, and of tracing the origin of direct and indirect inputs used in the production process, can be used in environmental studies by linking economic and environmental variables, on the production and consumption sides. From the production side, it is possible to measure, by considering the direct and indirect inputs used, how many natural resources were used and how much pollution was generated on the production of goods and services. On the demand side, it is possible to measure the environmental variables, natural resource, and pollution embodied in the goods and services consumed in the economy. Expanding the I-O models to a global scale, that is, using Inter-Country I-O models, it is possible to measure the environment impacts and contents of the goods and services by countries of the origin of production and by countries of consumption.
Christopher Fleming and Christopher Ambrey
The method and practice of placing monetary values on environmental goods and services for which a conventional market price is otherwise unobservable is one of the most fertile areas of research in the field of natural resource and environmental economics. Initially motivated by the need to include environmental values in benefit-cost analysis, practitioners of non-market valuation have since found further motivation in national account augmentation and environmental damage litigation. Despite hundreds of applications and many decades of refinement, shortcomings in all of the techniques remain, and no single technique is considered superior to the others in all respects. Thus, techniques that expand the suite of options available to the non-market valuation practitioner have the potential to represent a genuine contribution to the field.
One technique to recently emerge from the economics of happiness literature is the “experienced preference method” or “life satisfaction approach.” Simply, this approach entails the inclusion of non-market goods as explanatory variables within micro-econometric functions of life satisfaction along with income and other covariates. The estimated coefficient for the non-market good yields, first, a direct valuation in terms of life satisfaction and, second, when compared to the estimated coefficient for income, the implicit willingness to pay for the non-market good in monetary terms.
The life satisfaction approach offers several advantages over more conventional non-market valuation techniques. For example, the approach does not ask individuals to directly value the non-market good in question, as is the case in contingent valuation. Nor does it ask individuals to make explicit trade-offs between market and non-market goods, as is the case in discrete choice modeling. The life satisfaction approach nonetheless has some potential limitations. Crucially, self-reported life satisfaction must be regarded as a good proxy for an individual’s utility. Furthermore, in order to yield reliable non-market valuation estimates, self-reported life satisfaction measures must: (1) contain information on respondents’ global evaluation of their life; (2) reflect not only stable inner states of respondents, but also current affects; (3) refer to respondents’ present life; and (4) be comparable across groups of individuals under different circumstances. Despite these conditions, there is growing evidence to support the suitability of individual’s responses to life satisfaction questions for non-market valuation. Applications of the life satisfaction approach to the valuation of environmental goods and services to date include the valuation of air quality, airport noise, greenspace, scenic amenity, floods, and drought.
James B. London
Coastal zone management (CZM) has evolved since the enactment of the U.S. Coastal Zone Management Act of 1972, which was the first comprehensive program of its type. The newer iteration of Integrated Coastal Zone Management (ICZM), as applied to the European Union (2000, 2002), establishes priorities and a comprehensive strategy framework. While coastal management was established in large part to address issues of both development and resource protection in the coastal zone, conditions have changed. Accelerated rates of sea level rise (SLR) as well as continued rapid development along the coasts have increased vulnerability. The article examines changing conditions over time and the role of CZM and ICZM in addressing increased climate related vulnerabilities along the coast.
The article argues that effective adaptation strategies will require a sound information base and an institutional framework that appropriately addresses the risk of development in the coastal zone. The information base has improved through recent advances in technology and geospatial data quality. Critical for decision-makers will be sound information to identify vulnerabilities, formulate options, and assess the viability of a set of adaptation alternatives. The institutional framework must include the political will to act decisively and send the right signals to encourage responsible development patterns. At the same time, as communities are likely to bear higher costs for adaptation, it is important that they are given appropriate tools to effectively weigh alternatives, including the cost avoidance associated with corrective action. Adaptation strategies must be pro-active and anticipatory. Failure to act strategically will be fiscally irresponsible.
The world’s forest cover is approximately 4 billion hectares (10 billion acres). Of this total, approximately one-half is temperate forests. These range from the subtropics to roughly 65 degrees in latitude. As we move toward the equator, the forests would generally be considered tropical or subtropical, while forest above the 65th latitude might be considered boreal. Only a relatively small fraction of the forests that are temperate are managed in any significant manner. The major types of management can vary from serious forest protection to selective harvesting, with considerations for regeneration. Intensive forestry exists in the form of plantation forestry and is similar to agricultural cropping. Seedlings are planted, and the trees are managed in various ways while growing (e.g. fertilizers, herbicides, thinnings) and then harvested at a mature age. Typically, the cycle of planting and management then begins anew.
Approximately 200 million hectares of forests are managed beyond simply minimal protection and natural regeneration. Recent estimates suggest that over 100 million hectares globally are intensively managed planted forests. The largest representatives of these forests are found in the Northern Hemisphere (e.g., the United States), China, and various countries of Europe, especially the Nordic countries. However, Brazil, Chile, New Zealand, and Australia are important producers while being in the Southern Hemisphere. A high percentage of managed forests are designed to produce industrial wood for construction and for pulp and paper production.
Finally, in some countries like China, planted forests are intended to replace forests destroyed decades and even centuries ago. Many of these planted forests are intended to provide environmental services, including water capture and control, erosion control and soil protection, flood control, and habitat for wild life. Recently, forests are being considered as a vehicle to help control global warming. In addition, afforestation and/or reforestation may help address damages after a disturbance such as a fire. In China, the “green wall” has been established to prevent shoreline erosion in major coastal areas.
Edward B. Barbier
Since the 2004 Indian Ocean tsunami, there has been strong interest globally in restoring mangrove ecosystems and their potential benefits from protecting coastlines and people from damaging storms. However, the net economic gains from mangrove restoration have been variable; there have been some notable project successes but also some prominent failures. There is also an ongoing debate over whether or not the cost of mangrove restoration is justified by the benefits these ecosystems provide. Although the high costs of mangrove restoration and the risk of failure have led to criticism of such schemes, perhaps the more pertinent concern should be whether the ex post option of restoration is economically beneficial compared to preventing irreversible mangrove conversion to alternative land uses. Case studies on mangrove valuation from Brazil and Thailand illustrate the key issues underlying this concern. Since much recent mangrove restoration has been motivated by the trees’ potential storm-protection benefit, a number of studies have valued mangroves for this purpose. However, mangroves are also valued for other important benefits, such as providing collected products for local coastal communities and serving as nursery and breeding grounds for off-shore fisheries. The implications of these benefits for mangrove restoration can be significant. It is also important to understand the appropriate use of benefit transfer when it is difficult to value restored mangroves, methods to incorporate the potential risk of mangrove restoration failure, and assessment of cost-effective mangrove restoration.
Achilleas Vassilopoulos and Phoebe Koundouri
Water accounts for more than 70% of Earth’s surface, making marine ecosystems the largest and most important ecosystems of the planet. However, the fact that a large part of these ecosystems and their potential contribution to humans remains unexplored has rendered them unattractive for valuation exercises. On the contrary, coastal zones, , being the interface between the land, the sea, and human activities competing for space and resources, have been extensively studied with the objective of marine ecosystem services valuation. Examples of marine and coastal ecosystems are open oceans, coral reefs, deep seas, hydrothermal vents, abyssal plains, wetlands, rocky and sandy shores, mangroves, kelp forests, estuaries, salt marshes, and mudflats. Although there are arguments that no classification can capture the ways in which ecosystems contribute to human well-being and support human life, very often policymakers have to decide upon alternative uses of such natural environments. Should a given wetland be preserved or converted to agricultural land? Should a mangrove be designated within the protected areas system or be used for shrimp farming? To answer these questions, one needs first to establish the philosophical basis of value within the ecosystems framework. To this end, two vastly different approaches have been proposed. On the one hand, the nonutilitarian (biocentric) approach relies on the notion of intrinsic value attached to the mere existence of a natural resource, independent of whether humans derive utility from its use (if any) or preservation. Albeit useful in philosophical terms, this approach is still far from providing unambiguous and generally accepted inputs to the tangible problem of ecosystem valuation. The utilitarian (anthropocentric) perspective, on the other hand, assumes that natural environments have value to the extent that humans derive utility from placing such value. According to the total economic value (TEV) approach, this value can be divided into “use” and “nonuse.” Use values involve some interaction with the resource, either directly or indirectly, while nonuse values are derived simply from the knowledge that natural resources and aspects of the natural environment are maintained. Existence and altruistic values fall within this latter category.
Not surprisingly, economists have long revealed a strong preference for the utilitarian approach. As a result, the valuation of marine ecosystems requires that we understand the ecosystem services they deliver and then attach a value to the services. But what tools are available to economists when valuing marine ecosystems? For the most part, ecosystem services are not traded in formal markets and thus actual prices are usually not available. Valuation techniques essentially seek different ways to estimate measures like Willingness To Pay (WTP), Willingness To Accept (WTA), or expenditures and costs. The techniques used for the valuation of ecosystem services can be divided into three main families: market-based, revealed preference, and stated preference. Finally, value-transfer methods are also used when estimates of value are available in similar contexts. All these methods have advantages and disadvantages, with different methods being suitable for different situations. Hence, extra caution is required during the design and implementation of valuation attempts.