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date: 17 November 2017

Environmental Economics and the Anthropocene

Summary and Keywords

Geologists’ reframing of the global changes arising from human impacts can be used to consider how the insights from environmental economics inform policy under this new perspective. They ask a rhetorical question. How would a future generation looking back at the records in the sediments and ice cores from today’s activities judge mankind’s impact? They conclude that the globe has entered a new epoch, the Anthropocene. Now mankind is the driving force altering the Earth’s natural systems. This conclusion, linking a physical record to a temporal one, represents an assessment of the extent of current human impact on global systems in a way that provides a warning that all policy design and evaluation must acknowledge that the impacts of human activity are taking place on a planetary scale. As a result, it is argued that national and international environmental policies need to be reconsidered. Environmental economics considers the interaction between people and natural systems. So it comes squarely into conflict with conventional practices in both economics and ecology. Each discipline marginalizes the role of the other in the outcomes it describes. Market and natural systems are not separate. This conclusion is important to the evaluation of how (a) economic analysis avoided recognition of natural systems, (b) the separation of these systems affects past assessments of natural resource adequacy, and (c) policy needs to be redesigned in ways that help direct technological innovation that is responsive to the importance of nonmarket environmental services to the global economy and to sustaining the Earth’s living systems.

Keywords: Anthropocene, global change, natural resource scarcity, nonmarket valuation, induced innovation

Introduction

Neoclassical economics assumes that individuals’ choices are motivated by their efforts to seek the best outcomes possible with the resources they have. These decisions are always conditioned by the information people have available when they make them. A more formal economic definition for an efficient allocation describes it as requiring that resources be allocated to their highest valued uses. With the acceptance of consumer sovereignty, this logic maintains that it is people who should provide the values underlying any judgments about resource allocations.

With clear property rights, as well as private goods and services, markets can lead to efficient allocations defined in these terms. Not all goods and services would satisfy the features attributed to private commodities. Moreover, the processes people use to produce and consume the commodities they want necessarily lead to byproducts that can affect individuals who are not directly involved in either production or consumption of the things traded and used by others. These unintended outcomes are labeled externalities.

Finally, people are part of the natural world that provides both life-support and amenity services. These services can be affected by how the byproducts of production and consumption are disposed. The role of nature as a life-support system for people and their economic activities is so basic that it may seem unnecessary to mention. However, economics has been developed in ways that abstract from the role of people in affecting and being affected by the natural systems that provide these life-support services. Similarly, ecology often treats natural systems as being disturbed by human activity, implying that human activity cannot be part of the “natural” processes this science seeks to describe and analyze.

Environmental economics considers the interaction between people and natural systems. So it can come squarely into conflict with conventional practices in both economics and ecology, each in different ways. Its focus is on the ways that economic concepts can be used to address the potential for unintended consequences from the majority of what would be classified as the economic activities of production and consumption. It also considers how the public sector should evaluate choices that involve environmental assets that may provide non-rival services to large segments of a population.

This essay uses the recent attention given by natural scientists to framing the global changes that are arising from human impacts in a different way. Under this perspective, geologists ask a rhetorical question. Suppose we had access to the type of summary information on the record of past global changes and did not have to wait thousands of years. This is asking for scientists to evaluate current data from the perspectives used in reconstructing what happened in the past. Something comparable to this record will be available to a future generation looking back at the records in the sediments and ice cores from this generation’s activities. Advances in monitoring and science imply that today’s scientists have an understanding of what that future record will look like. Based on it, today’s geologists are asking whether those future scientists would conclude that mankind was the driving force altering natural systems during this period of the Earth’s history. For many in the scientific and policy communities, this perspective changes their interpretation of the extent of the impact of human activity and its consequences. More specifically, if there is scientific agreement that the forces influencing the Earth’s observed record on a geological time scale have changed, and people are the ones who are responsible for those changes, it would certainly be easier to accept a conclusion that the scale of effects must be large. This essay asks, in this context, what does environmental economics have to contribute to addressing global problems when they are framed in this way?

The section “What Is the Anthropocene?” describes how geologists characterize epochs in the evaluation of the Earth as a collection of natural systems. It focuses particularly on the definition of the Anthropocene and the relevance of an assessment that we have moved into this new epoch. The section “Economic Activity and Natural Systems” describes why the economic isolation of activities from nature and ecologists’ abstraction of natural systems from people are important. The section “Commons, Self-Regulation, and the Devolution of Responsibility for Resource Management” summarizes how economists have assessed the importance of nature for economic activities. It describes what this assessment has missed and why that is relevant. The last section “The Anthropocene, Climate Change, and Economic Growth” considers how the concepts that are raised by describing the Anthropocene epoch relate to the ways environmental economics should reframe the discussion of climate change, technological innovation, and economic growth.

What Is the Anthropocene?

When scientists use the geologic record, involving the structure of rocks, composition of sediments, and glacial measurements, to characterize the Earth’s evolution, including its climate and the likely spatial distributions of plants and animals, they are attempting to connect a physical record to a temporal scale. The Holocene epoch has been defined as the period corresponding to the post-glacial time span when there were a number of distinctive influences on this record—warming, sea level rise, and the acceleration in human activity in different areas. All of these factors were forces that were observable in the available geological measures. Crutzen (2002) proposed the term “Anthropocene” for this new epoch. He was describing a change from the Holocene as a way to reflect a change in the extent of human impact on the global environment. Under this view, the Earth’s geology has been fundamentally altered by human activity. The new era changed the role of mankind from a small spatially dispersed influence to the dominant force in the transformation of the Earth’s natural systems. He suggested that these changes began around the end of the 18th century as the air trapped in the polar ice displayed greater concentrations of carbon dioxide and methane.

This designation is not without controversy. The International Commission on Stratigraphy (ICS) is the group responsible for official geological units in the Earth’s evolution (the distinct epochs and ages) for the past 2 ½ million years. As Carey (2016) reported, the chair of the commission indicated their role was one of defining rock units, not changes in Earth systems.

What is distinctive from the perspective of those outside this specialized group in geology is the intended inference. That is, the ICS is being asked a rhetorical question. Would those scientists living at some future time look at the same data available from rocks, sediments, and so on today and judge that a transition had taken place to a new epoch? If so, then today’s scientists, trained to look at past records, have a unique role. They can “aggregate” a collection of changes in a different way, using the links between geological records and temporal scales, and extract a new type of judgment about human influence.

The act of forecasting this future conclusion would also assess the extent of current human impact on global systems. Such an assessment would implicitly carry a warning that all policy design and evaluation must acknowledge that the impacts of human activity are taking place on a planetary scale. As a result, it is argued that national and international environmental policies need to be reconsidered. Global stewardship must be required to avoid threats to the life-support systems essential to humanity. Steffen, Crutzen, and McNeill (2007) call for this stewardship implicitly assuming there is a clear understanding of how human activities “add up” to affect the course of these Earth systems.

Economic Activity and Natural Systems

The historical development of economics and that of ecology share a common flaw. For much of the development of each discipline, the contributors involved ignored the relevance of one for the other. That is, despite the essential role of natural systems in sustaining human life, nature in this role is left out of economic models. It is taken as a given that these life-support systems are unaffected by people in their role as economic agents. Equally important, early discussions of ecology viewed nature as a balanced system without people (see Marsh, 1865). People were the disturbing influence. A more apt description would label ecological resources, at each scale, as complex adaptive systems. The components are heterogeneous. They are linked in nonlinear ways and the flows among the parts reinforce developments that lead to hierarchical structures. Nonetheless, there remains an important disparity in how many ecologists view human activities. In commenting on the evolution of the understanding of ecosystems since Marsh, Mooney and Ehrlich (1997) note that

More than 130 years after the publication of Man and Nature most educated people remain sadly unaware of its basic message. Their inadvertent ignorance of the services that natural ecosystems supply to the human enterprise—of the reasons that the economy is a wholly owned subsidiary of those systems—amounts to a condemnation of schools, colleges, universities, and the print and electronic media.

(p. 17)

Economic models were structured in an equally detached setting and, despite the development of the field of environmental economics, remain that way today. The circular flow model of economics is likely the first description of economic activity most students encounter. It characterizes the economy by referring to the interactions between people as different types of economic agents that account for the important flows of real resources and the expenditures required to pay for them. Patinkin (1973) attributes its origins to Frank Knight. In this model all the important interactions take place in markets. This model focuses on those connections that balance “incentives” at the margin through the relative prices established by market exchange. The framework gained traction in teaching the discipline as it received increasing attention in Paul Samuelson’s classic introductory economics text. He used it in explaining the determination of relative prices within a general equilibrium system. This role has not diminished. A leading economist whose research considers the design of national income and wealth accounts has argued that modern income and wealth accounting systems should use the circular flow structure as a guiding principle in their design (Hulten, 2006).

While recent treatments of general equilibrium models acknowledge other ways people can interact, and may discuss the services of the natural environment, the mainstream consensus holds that the interactions between people and environmental systems are of secondary importance.

This judgment was reinforced by the assessment of two Nobel laureates in an early evaluation of the models for consumption externalities. To understand the impact of their judgment in relationship to the interactions between environmental and general economists, some background is necessary. Early discussions of externalities by Buchanan and Kafoglis (1963) and Castle (1965) emphasized the physical sources of reciprocal relationships between people in different activities that underlie externalities. Ayres and Kneese (1969) highlighted the importance of materials and energy balance constraints for managing the residuals from consumption and production. Recall that the disposal practices of those residuals can create externalities. These disposal decisions provide examples of the physical sources of reciprocal relationships.

These arguments, as well as the empirical features of production and consumption activities, create the potential for what Diamond and Mirrlees (1973) labeled as “anomalous behavior.” That is, with strong-enough connections outside markets, it may appear that aggregate, compensated demand curves were not guaranteed to have negative slopes with respect to the price. Under these conditions, Diamond and Mirrlees’ influential paper argued it was appropriate to impose assumptions about the preferences between market goods and the measures used for the effects of those externalities. These could include health effects of deteriorations in the amenity services provided by specific types of natural resources. The assumption of separability would preclude pronounced effects on people’s behavior through the feedbacks that would in turn lead to strong reciprocal relationships. Depending on what is held constant in defining the compensated demand functions (see Cornes, 1980, for an alternative interpretation of Diamond and Mirrlees), it is possible to define conditions where the aggregate demand function for the private good involved in generating the external effects does not conform to standard economic properties. Modern ecological and economic analyses appear to suffer from the “observer bias.” Each discipline makes judgments about how the influence of people can be characterized by the relationship to the natural environment and leaves out the key roles played by elements described by the other system. Often, each concludes that the other is incidental or a disturbance rather than an integral component. These are not two systems or one with the economy as a limited subsidiary of a collection of natural processes that are persistently disturbed by mankind. People are part of nature. How they organize, produce, consume, and agree to limit themselves should be treated as a part of the complex adaptive system describing all of nature.

This recognition is important in judging the optimism that accompanies most of the calls for environmental stewardship that are key part of the implications of recognition of the Anthropocene as a new epoch. The available evidence suggests our understanding of the joint economic and ecological system is not sufficient to meet the challenges that are implied by stewardship.

Commons, Self-Regulation, and the Devolution of Responsibility for Resource Management

With private ownership of all resources, complete information among those who are participating in economic interactions, market exchange can lead to efficient allocation of the items exchanged. Of course, as the previous discussion implies these conditions rarely arise in a real setting. Moreover, they assign externalities and non-rival goods and services to small roles in the overall structure of modern economies.

One way that the failures to satisfy these assumptions has been described uses an analogy to the “tragedy of the commons” to organize the discussion (Hardin, 1968). That is, where the services of a resource are available in an unregulated setting, private action will lead to overuse and may, in dynamic settings, lead to the collapse of the system providing the services. This problem has been described as resulting from an inability to enforce property rights. It is argued that if such rights were in place, then there would be mechanisms available to regulate the patterns of use and thereby avoid the overuse.

A variety of responses have been proposed to remedy this situation. All share a common analytical feature that, in the case of environmental resources, relates to the characterization of the natural systems in relation to human activity. One simple way to describe it uses a concept from basic economics known as “the law of one price.” In applied settings, when economists are asked about the geographical boundaries of a market, they often answer by saying, with full information available to all market participants, it is the area where, after accounting for transportation costs, the price of the same good is unchanged regardless of the seller who provides it or the person who buys it.

In the context of natural systems, we don’t have a “price” to guide specifications for the relevant geography. It may be argued that the natural system itself delineates the physical extent of the market. People use the services of natural systems. Under this view, one may conclude that the observed users capture all of those individuals who may care about them.

Nobel laureate Elinor Ostrom (2009) argued, for resources where the physical domain for use is a reasonable working definition, one should consider whether there are informal rules governing the patterns of that use which allow the users to recognize their effects and self-regulate all relevant users’ activities. The outcome of these processes may not be the efficient allocation, as a formal economic model may define it, but she argued (and offered empirical evidence in some special situations) that the results can be close to it. The final determinants of this correspondence between actual and efficient outcomes depend on the ease of recognizing the effects of individuals’ uses of the resource providing the services and the ability to identify those who break the rules by cheating. Both of these attributes are features of the physical extent of the “informal market.” That is, where open access services are conveyed in limited physical areas, the outcomes of overuse are easier to observe, and misuse of the resource, based on an established, common standard for behavior, is easier to monitor.

This argument is closely related to the implications often derived from Tiebout’s (1956) model for the devolution of responsibility for providing public services to local communities. Such services are not fully private in their features. This characteristic has been referred to as non-rival services, in that they can be consumed by many people at the same time without diminishing the amount that is available for others. Tiebout reasoned that if these services are limited in the physical extent of their market, so that only those in local areas could enjoy them, then individual communities would be induced to organize and act to provide the types and amounts of public services that best match what their residents wanted. Moreover, once this system of different communities with diverse sets of public services existed, individuals could migrate between them, selecting the community with public services and costs that best matched their desires. Here again, the extent of the market for the delivery and access to these public services is central to the Tiebout logic.

When Ostrom’s and Tiebout’s models are applied to environmental services, the analyses must limit, implicitly, the interconnections in the natural systems and the flows connecting different components of those systems. Equally important, they are defining the individuals who care about the status of these environmental assets to correspond to those who are the users.

This perspective stands in contrast with Krutilla’s (1967) analysis calling for a reconsideration of how public decisions were made to conserve natural areas. His arguments have more general implications. He highlighted the importance of the assumption about who is identified as relevant in defining the economic worth of different types of uses of natural environments. People may “care” about environmental services or the amount and quality of other local public services even though they would not be identified as “users.”

Thus, there are both physical reasons, deriving from the interconnections in natural systems, and economic reasons, deriving from what people want. People care about protecting natural areas because they might feel “we,” as a society, don’t have the right to change them. They may want to be sure the opportunity for future use is maintained for coming generations. In the case of local public goods they may feel better education assure better governance due to an informed electorate. Unless both the physical and the economic reasons are reflected in the design of institutions to manage resources, the outcomes cannot be assured to fit the Ostrom and Tiebout conclusions. As a result, the feasibility of resolving issues associated with open access resources providing services that have public good characteristics through devolution of the responsibilities for them is not guaranteed. It depends on what we are prepared to assume.

For example, should a specific town along a river decide the water quality of the part of the river that is nearest to it? Water flowing downstream from each specific location will be affected by the choices made at that location, and downstream water quality may not be the first consideration of residents of upstream towns. What about the concerns of those households downstream of the town? How are their interests represented by those making these decisions under this arrangement? Do Western states in the United States make the best decisions on the preservation of natural wonders within their boundaries? Consider the case of the Grand Canyon. Residents in Arizona, Utah, or Nevada may be the closest to this unique area. But how do their choices reflect the wishes of those households who are not physically proximate to the resource and “care” how it is used (and would be willing to pay to assure that their desires are taken into account)?

The answers to these types of questions must deal with both the natural interconnections between the natural assets providing environmental services and the decisions about who should “count” in assessing how they are managed.

A New Perspective on Scarcity

The earliest discussions of economic importance of natural resources emphasized the importance of land to overall economic activity through agriculture (Ricardo, 1963). After World War II, the circumstances changed. British economists, such as Harrod (1948), discarded the law of diminishing returns from land, arguing that it was quantitatively unimportant. Writing a few years later, Nobel laureate Schultz (1951) concluded that the limitations of nature, as represented by land, were no longer important. Nonetheless, there remained nagging anxiety about these stylized facts concerning the importance of what were described as the raw material and energy demands for economic growth after the war. Barnett and Morse’s (1963) analysis and persuasive discussion of natural resource scarcity put the issues to rest for nearly two decades. They concluded that

The physical properties of the natural resource base impose a series of initial constraints on the growth and progress of mankind, but the resource spectrum undergoes kaleidoscopic change through time. Continual enlargement of the scope of substitutability—the result of man’s technological ingenuity and organizational wisdom—offers those who are nimble a multitude of opportunities for escape. The fact of constraint does not disappear, it merely changes character. New constraints replace the old, new scarcities generate new offsets.

(p. 244)

This quote vividly captures the process that describes the evaluation of natural resource scarcity over the half-century since Barnett and Morse was first published. Persistent concerns arose again after international events induced oil shortages in the mid 1970s. Krautkraemer (2005) provides a general discussion of the assessment of natural resource scarcity in the early part of the 21st century and concludes that the empirical evidence did not alter the Barnett-Morse assessment. Moreover, he adds the same concerns as they did, noting these types of assessments are about natural resources as commodities and do not consider the nonmarket amenity services.

All of these assessments omit the environmental costs (the economic value of the degradation of environmental services) due to the strategies used to meet resource limitations. For the most part, assessments of the economic value of environmental services are all local. They generally describe marginal values for small changes in these services. They are often measured with proxy variables that are difficult to connect to the measures developed by natural scientists under controlled field or laboratory conditions for components of these same resources. As a result they are only relevant to the specific contexts in which they are measured.

Assessments of the scarcity of marketed natural resources rely on arbitrage that allows an index of relative prices to signal availability of those resources. Unfortunately, there are few opportunities for arbitrage with spatially delineated environmental services. Certainly, at the individual level, economic models of behavior suggests people substitute a high-quality lake or river for recreation or a higher-quality neighborhood for a more polluted one. These activities are specific to the person and the resource. Place and context matter.

To the extent the geological changes implied by the Anthropocene are large enough to warrant designating a new era based on the forces influencing the Earth’s natural systems, this conclusion has important implications for scarcity indexes. That is, the call for decisions based on stewardship of global resources requires information on the consequences of private actions for nonmarket environmental services. It requires recognition of the linkages between these natural systems that can affect each system’s capacity to continue to provide services. Even aside from this technical level of understanding of the complexity of these systems, the current literature on the valuation of ecosystem services is far from meeting the needs for measuring how people’s tradeoffs for interrelated systems’ services change with policy-induced modifications in several components of them (see Barbier, 2011; Bockstael, Freeman, Kopp, Portney, & Smith, 2000).

The Anthropocene, Climate Change, and Economic Growth

Discussions of the Anthropocene epoch reframe the debates about climate change as a key driver of global change. As noted at the outset, they are asking whether scientists at some future date, using the geological records available to them based on what is happening today, would conclude that the Earth system had entered a new epoch where a new set of forces was behind the patterns observed in rock sediment and ice core. If this assessment is made independently of the measurement of greenhouse gases in the atmosphere or of the mean surface temperatures, then it is an important dimension of the “stylized facts” on the responses of the natural system to human activity. The next logical question for economists concerns whether economic analysis can inform responses to this judgment.

Here the record is not consistent with the conclusions of scientists writing about the Anthropocene. These scholars implicitly assume that humans have within their reach the information base and institutional structures needed to become effective stewards of the Earth’s natural systems.

The literature on the economics of climate policy offers detailed evidence on the impacts of policy to limit carbon emissions on the operations of market-based economic activities (see Carbone, Morgenstern, Williams, & Burtraw, 2013; Goulder & Hafstead, 2013; Williams, 2016 as examples). We have available integrated economic assessment models describing the dynamic responses of economic activity to restrictions on the emissions of carbon. These models include damages but they largely assume that they act through reductions in productivity of the processes providing market goods. Their treatment of nonmarket environmental resources providing life-support and amenity services does not provide meaningful guidance to the stewardship envisioned in discussions of the Anthropocene.

These models have primarily been used to estimate the economic costs arising from policies defined as reductions of an additional ton of carbon emissions into the atmosphere. The first, and most widely available, of these models is Nordhaus’ (2014) dynamic integrated model of climate and the economy (DICE). It determines the path of optimal economic growth in response to restrictions on carbon emissions. All damages in this model are represented as a reduced-form, quadratic function of measures for the globally averaged temperature change. All the effects of climate change are represented as a scaling of an aggregate output index that can be used for either consumption or investment. There are no other effects on choice variables in the model. Solving the model with externally imposed restrictions on the emissions of carbon yields, as a set of shadow values over time, estimates of the social costs of carbon.

While it is important to recognize the limitations in the existing characterization of integrated assessment models, it is especially important to avoid the conclusion that economic analysis is not important to the framing of policy. On the contrary, economic assessments of the consequences of the global changes posed by the scale of man’s activity will be central to the definition of what is meant by stewardship. Models that reflect both market substitutions and nonmarket responses need to be developed to meet this objective.

Lessons from the Past and Future Research Questions

The history of the early research on natural resource adequacy offers insights into how these models should be developed and how their results can be used to frame and evaluate policy choices associated with stewardship. First, Barnett and Morse’s message that innovation responds to constraints and often relaxes them is important. However, there is an equally important qualification to their optimism. The inducement mechanism yielding new technologies responds to signals, and there is a clear need to assure that private market forces reflect the full costs of each activity. Technological innovation is directed to economize on resources where property rights are well defined and the costs of those resources apparent to users. The “new” directions that these innovations offer may well have unintended consequences that are overlooked. As a rule, the very incentives that push innovation to economize on private resources seek out areas where services are available on what appears to be a virtually free basis. As a result, technical change is induced to use more of them (Smith, 1972). Recognition of this feature of the inducement process implies that there is a need to monitor how production or consumption activities respond to scarcities. If these responses have implications for the use of environmental services, the long-term implications are especially important. Signals of the importance of nonmarket resources (and their values) need to be continuously updated and recognized. These signals must be a part of the full costs that innovations are intended to address.

In addition, feedbacks, especially nonlinear ones, are important to the outcomes we observe in complex systems. In the face of uncertainty, opportunities to provide insurance are recognized as important. What is not recognized is that natural systems can provide a form of public insurance for life-support systems and for the services of physical capital.

Geography and the spatial delineation of both economic activity and the natural systems that sustain human activity need to become essential elements in the modeling of the Earth system.

Finally, market and natural systems are not separate. They are part of one system. Often, models for these systems are adjusted to allow convenient solutions. Convenience cannot trump relevance. Recognition of the joint interaction of these systems in determining market and nonmarket outcomes is essential to developing models that inform stewardship. This recognition must also reflect the differences in the time scales associated with observing “equilibrium-like” outcomes within each type of model. This research agenda is consistent with increasing efforts to bridge the disciplines.

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