View source for Environmental economics

{{Short description|Sub-field of economics}}
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[[File:Growth, Development and Environmental Economics in Asia (17241141112).jpg|thumb|Growth, Development and Environmental Economics in Asia discussion at Chatham House, London]]
{{Green economics sidebar}}
'''Environmental economics''' is a sub-field of [[economics]] concerned with [[environmental issues]].<ref>{{Cite web |title=Understanding Environmental Economics |url=https://www.investopedia.com/terms/e/environmental-economics.asp |access-date=2022-05-01 |website=Investopedia |language=en}}</ref> It has become a widely studied subject due to growing environmental concerns in the twenty-first century. Environmental economics "undertakes theoretical or empirical studies of the economic effects of national or local [[Environmental policy|environmental policies]] around the world. Particular issues include the costs and benefits of alternative environmental policies to deal with [[air pollution]], [[water quality]], [[toxicant|toxic substances]], [[Municipal solid waste|solid waste]], and [[Climate change|global warming]]."<ref>{{cite web
  | title = Environmental Economics
  | work = NBER Working Group Descriptions
  | publisher = National Bureau of Economic Research
  | url=https://www.nber.org/workinggroups/ee/ee.html
  | access-date = 2006-07-23 }}</ref>

== Environmental Versus Ecological Economics ==
Environmental economics is distinguished from [[ecological economics]] in that ecological economics emphasizes the economy as a subsystem of the ecosystem with its focus upon preserving [[natural capital]].<!--<ref>http://www.eoearth.org/article/Environmental_and_ecological_economics Lead Author: Robert Nadeau Article Topics: Ecological economics and Environmental economics Last Updated: August 26, 2008</ref> --><ref>Jeroen C.J.M. van den Bergh (2001). "Ecological Economics: Themes, Approaches, and Differences with Environmental Economics," ''Regional Environmental Change'', 2(1), pp. [http://www.ima.kth.se/utb/mj2694/pdf/Bergh.pdf 13-23] {{webarchive|url=https://web.archive.org/web/20081031133858/http://www.ima.kth.se/utb/mj2694/pdf/Bergh.pdf |date=2008-10-31 }} (press '''+''').</ref> While environmental economics focuses on human preferences, by trying to balance protecting [[natural resource]]s with people's needs for products and services.<ref name=":3" /> Due to these differences it can be seen that ecological economics takes a more holistic approach to traditional economic theories, while environmental economics fits within traditional economic theories.<ref name=":3" />

One survey of German economists found that ecological and environmental economics are different [[schools of economic thought]], with [[Ecology|ecological]] economists emphasizing "strong" [[sustainability]] and rejecting the proposition that human-made ("physical") capital can substitute for natural capital.<ref>Illge L, Schwarze R. (2009). [https://www.researchgate.net/publication/23647971_A_Matter_of_Opinion_How_Ecological_and_Neoclassical_Environmental_Economists_Think_about_Sustainability_and_Economics A Matter of Opinion: How Ecological and Neoclassical Environmental Economists Think about Sustainability and Economics] . Ecological Economics.</ref> And environmental economics focusing on the efficient allocation of natural resources in order to fulfill human wants.<ref name=":3" />

== History ==

=== 18th and 19th Century ===
Although the term "environmental economics" became popular beginning in the 1960s, the entwinement of the two fields of environmentalism and economics started much earlier. Starting with economist [[Marquis de Condorcet]] in the 18th century, who had an interest in the link between economic activity and environmental issues.<ref name=":1">{{Cite journal |last=Sandmo |first=Agnar |title=The Early History of Environmental Economics |url=https://www.journals.uchicago.edu/doi/10.1093/reep/reu018 |journal=Chicago Journals |volume=9 |issue=1}}</ref> This was seen in his usage of [[Externality|externalities]] while analyzing environmental issues.<ref name=":1" />

During the [[Classical economics|classical period of economics]], [[Adam Smith]] realized while the market is able to allocate private goods efficiently for most goods, it fails to do so in some environmental circumstances.<ref name=":1" /> It is within these scenarios where the market fails, that the government needs to take action.<ref name=":1" /> This is seen in his quote "Erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit would never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society."<ref>{{Cite journal |last=Smith |first=Adam |date=1776 |title=An inquiry into the nature and causes of the wealth of nations |journal=Ocford University Press}}</ref> [[Thomas Robert Malthus]] also was another classical economist whose work led to the beginnings of environmental economists.<ref name=":1" /> Malthus' theory of population argued that agricultural productivity faces diminishing returns, which ultimately limits the exponential growth of human populations.<ref name=":1" /> This thought process later led economists to think about the relationship between resource scarcity and economic development.<ref name=":1" /> [[David Ricardo]]'s writings connected the natural environment and the standard of living which further helped to develop environmental economics later on.<ref name=":1" /> He stressed that the value of land varies based on how fertile it is.<ref name=":1" /> The last classical economist to add to environmental economics was [[John Stuart Mill]].<ref name=":1" /> In his [[Principles of Political Economy]], he wrote that the management of the environment cannot be done by the market and individuals, and is instead a governmental obligation, "[I]s there not the earth itself, its forests and waters, and all other natural riches, above and below the surface? These are the inheritance of the human race, and there must be regulations for the common enjoyment of it. What rights, and under what conditions, a person shall be allowed to exercise over any portion of this common inheritance cannot be left undecided. No function of government is less optional than the regulation of these things, or more completely involved in the idea of civilized society."<ref>{{Cite journal |last=Mill |first=John Stuart |date=1848 |title=Principles of political economy: Collected works of John Stuart Mill |journal=University of Toronto Press |volume=2-3}}</ref>

=== 20th Century ===
Environmental economics became increasingly more popular in the 19th century.<ref name=":2">{{Cite journal |last=Pearce |first=David |date=2002 |title=An Intellectual History of Environmental Economics |url=https://www.annualreviews.org/content/journals/10.1146/annurev.energy.27.122001.083429 |journal=Annual Review |volume=27 |pages=57–81}}</ref> This is when the [[Resources for the Future]] (RFF) was established in Washington, D.C. This independent research organization applied economics to environmental issues.<ref name=":2" /> During this time [[H. Scott Gordon]] released his paper "Economic Theory of a Common Property Resource: The Fishery" which claimed that open access fisheries can be exploited leading to economic rents to be dissipated.<ref name=":2" /> Another important paper adding to environmental economics at this time was "Spaceship Earth" by [[Kenneth E. Boulding]].<ref name=":2" /> This paper describes the physical limits of earths resources and how technology cannot truly help humans push those limits.<ref name=":2" /> Finally, [[Ronald Coase]] created an economic solution to environmental issues, which solidified environmental economics as a sub field of economics.<ref name=":2" /> He believed that there were two solutions 1) to tax the creator of the polluter and to create regulation that put the burden of action on the polluter or 2) the sufferer must pay the polluter to not pollute.<ref name=":2" />

== Topics and concepts ==
{{Economics sidebar}}

=== Market failure ===
[[File:Pollution de l'air.jpg|thumb|right|230px|Air pollution is an example of market failure, as the factory is imposing a negative external cost on the community.]]
Central to environmental economics is the concept of market failure. [[Market failure]] means that markets fail to allocate resources efficiently. As stated by Hanley, Shogren, and White (2007):<ref>Hanley, N., J. Shogren, and B. White (2007). Environmental Economics in Theory and Practice, Palgrave, London.</ref> "A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off." This results in an inefficient market that needs to be corrected through avenues such as government intervention. Common forms of market failure include externalities, non-excludability and [[Rivalry (economics)|non-rivalry]].<ref name=":3">{{Cite journal |last=Omer |first=Abdeen Mustafa |date=March 17, 2023 |title=Environmental and Ecological Economics |url=https://www.heraldopenaccess.us/openaccess/environmental-and-ecological-economics |journal=HSOA Journal of Environmental Science: Current Research}}</ref>

=== Externality ===
An [[externality]] exists when a person makes a choice that affects other people in a way that is not accounted for in the market price. An externality can be positive or negative but is usually associated with negative externalities in environmental economics. For instance, water seepage in residential buildings occurring in upper floors affect the lower floors.<ref>Rita Yi Man Li (2012), The Internalisation Of Environmental Externalities Affecting Dwellings: A Review Of Court Cases In Hong Kong, Economic Affairs, Volume 32, Issue 2, pages 81–87</ref> Another example concerns how the sale of Amazon timber disregards the amount of carbon dioxide released in the cutting.<ref>{{Cite news|title=Environmental degradation replaces classic imperialism|last=Chapman|first=Same|date=May 3, 2012|work=The Whitman College Pioneer: Whitman College}}</ref>{{Better source needed|date=July 2018}} Or a firm emitting [[pollution]] will typically not take into account the costs that its pollution imposes on others. As a result, pollution may occur in excess of the 'socially efficient' level, which is the level that would exist if the market was required to account for the pollution. A classic definition influenced by [[Kenneth Arrow]] and [[James Meade]] is provided by Heller and Starrett (1976), who define an externality as "a situation in which the private economy lacks sufficient incentives to create a potential market in some good and the nonexistence of this market results in losses of [[Pareto efficiency]]".<ref>Heller, Walter P. and David A. Starrett (1976), On the Nature of Externalities, in: Lin, Stephen A.Y. (ed.), Theory and Measurement of Economic Externalities, Academic Press, New York, p.10</ref> In economic terminology, externalities are examples of [[market failure]]s, in which the unfettered market does not lead to an efficient outcome.

=== Common goods and public goods ===
When it is too costly to exclude some people from access to an environmental resource, the resource is either called a [[common-pool resource|common property resource]] (when there is rivalry for the resource, such that one person's use of the resource reduces others' opportunity to use the resource) or a [[Public good (economics)|public good]] (when use of the resource is [[rivalry (economics)|non-rivalrous]]). In either case of non-exclusion, market allocation is likely to be inefficient.

These challenges have long been recognized. [[Garrett Hardin|Hardin]]'s (1968) concept of the [[tragedy of the commons]] popularized the challenges involved in non-exclusion and common property. "Commons" refers to the environmental asset itself, "common property resource" or "common pool resource" refers to a property right regime that allows for some collective body to devise schemes to exclude others, thereby allowing the capture of future benefit streams; and "open-access" implies no ownership in the sense that property everyone owns nobody owns.<ref name="Ostrom, E 1990">Ostrom, E. 1990. Governing the Commons. Cambridge: Cambridge University Press.</ref>

The basic problem is that if people ignore the scarcity value of the commons, they can end up expending too much effort, [[over harvesting]] a resource (e.g., a fishery). Hardin theorizes that in the absence of restrictions, users of an open-access resource will use it more than if they had to pay for it and had exclusive rights, leading to [[environmental degradation]]. See, however, [[Elinor Ostrom|Ostrom]]'s (1990) work on how people using real common property resources have worked to establish self-governing rules to reduce the risk of the tragedy of the commons.<ref name="Ostrom, E 1990" />

The [[mitigation of climate change]] effects is an example of a public good, where the social benefits are not reflected completely in the market price. Because the personal marginal benefits are less than the social benefits the market under-provides climate change mitigation. This is a public good since the [[Climate risk|risks of climate change]] are both non-rival and non-excludable. Such efforts are non-rival since climate mitigation provided to one does not reduce the level of mitigation that anyone else enjoys. They are non-excludable actions as they will have global consequences from which no one can be excluded. A country's incentive to invest in carbon abatement is reduced because it can "[[Free rider problem|free ride]]" off the efforts of other countries. Over a century ago, Swedish economist [[Knut Wicksell]] (1896) first discussed how public goods can be under-provided by the market because people might conceal their preferences for the good, but still enjoy the benefits without paying for them.
<gallery caption="Global biochemical cycles" widths="140px" heights="80px" perrow="4">
File:Nitrogen Cycle.jpg|[[Nitrogen cycle]]
File:Water cycle.png|[[Water cycle]]
File:Carbon cycle-cute diagram.svg|[[Carbon cycle]]
File:Oxygen Cycle.jpg|[[Oxygen cycle]]
</gallery>

=== Valuation ===
Assessing the economic value of the environment is a major topic within the field. The values of [[natural resource]]s often are not reflected in prices that markets set and, in fact, many of them are available at no monetary charge. This mismatch frequently causes distortions in pricing of natural assets: both overuse of them and underinvestment in them.<ref>UK Government Official Documents, February 2021, [https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957629/Dasgupta_Review_-_Headline_Messages.pdf "The Economics of Biodiversity: The Dasgupta Review Headline Messages"]</ref> Economic value or tangible benefits of [[ecosystem services]] and, more generally, of natural resources, include both use and indirect (see the [[Ecological economics#Nature|nature section]] of ecological economics). Non-use values include existence, option, and bequest values. For example, some people may value the existence of a diverse set of species, regardless of the effect of the loss of a species on ecosystem services. The existence of these species may have an option value, as there may be the possibility of using it for some human purpose. For example, certain plants may be researched for drugs. Individuals may value the ability to leave a pristine environment for their children.

Use and indirect use values can often be inferred from revealed behavior, such as the cost of taking [[travel cost analysis|recreational trips]] or using [[hedonic model|hedonic methods]] in which values are estimated based on observed prices. These use values can also be predicted through defensive behavior against pollution or environmental hazards, which can reveal how much people are willing to spend on healthcare and other preventative measures to avoid these hazards.<ref>{{Cite journal |last=Williams |first=Austin M. |date=2019-09-01 |title=Understanding the micro-determinants of defensive behaviors against pollution |url=https://www.sciencedirect.com/science/article/abs/pii/S0921800918304993#:~:text=%E2%80%9CDefensive%20behavior%E2%80%9D%20in%20this%20context,such%20as%20taking%20respiratory%20medications. |journal=Ecological Economics |volume=163 |pages=42–51 |doi=10.1016/j.ecolecon.2019.05.007 |issn=0921-8009|url-access=subscription }}</ref> Another health-based predictor of environmental use value is the [[Value of life|value of a statistical life]] (VSL), which provides an estimate of how much people are willing to pay for small reductions in their risk of dying from environmental hazards.<ref>{{Cite web |last=US EPA |first=OP |date=2014-04-20 |title=Mortality Risk Valuation |url=https://www.epa.gov/environmental-economics/mortality-risk-valuation#:~:text=In%20the%20scientific%20literature,%20these,would%20be%20willing%20to%20pay |access-date=2025-05-07 |website=[[United States Environmental Protection Agency]] |language=en}}</ref> Non-use values are usually estimated using stated preference methods such as [[contingent valuation]] or [[choice modelling]]. Contingent valuation typically takes the form of surveys in which people are asked how much they would pay to observe and recreate in the environment ([[willingness to pay]]) or their willingness to accept (WTA) compensation for the destruction of the environmental good. [[Hedonic pricing]] examines the effect the environment has on economic decisions through housing prices, traveling expenses, and payments to visit parks.<ref>Harris J. (2006). ''[https://books.google.com/books?id=I8seDAAAQBAJ&q=%22Environmental+economics%22 Environmental and Natural Resource Economics: A Contemporary Approach]''. Houghton Mifflin Company.</ref>

=== State subsidy ===
Almost all governments and states magnify environmental harm by providing various types of subsidies that have the effect of paying companies and other economic actors more to exploit natural resources than to protect them. The damage to nature of such public subsidies has been conservatively estimated at $4-$6 trillion U.S. dollars per year.<ref>UK Government Official Documents, February 2021, [https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/957629/Dasgupta_Review_-_Headline_Messages.pdf "The Economics of Biodiversity: The Dasgupta Review Headline Messages"] p. 2</ref>

== Solutions ==
Solutions advocated to correct such externalities include:

* ''[[United States Environmental Protection Agency#Related legislation|Environmental regulations]]''. Under this plan, the economic impact has to be estimated by the regulator. Usually, this is done using [[cost–benefit analysis]]. There is a growing realization that regulations (also known as "command and control" instruments) are not so distinct from economic instruments as is commonly asserted by proponents of environmental economics. E.g.1 regulations are enforced by fines, which operate as a form of tax if pollution rises above the threshold prescribed. E.g.2 pollution must be monitored and laws enforced, whether under a pollution tax regime or a regulatory regime. The main difference an environmental economist would argue exists between the two methods, however, is the total cost of the regulation. "Command and control" regulation often applies uniform emissions limits on polluters, even though each firm has different costs for emissions reductions, i.e., some firms, in this system, can abate pollution inexpensively, while others can only abate it at high cost. Because of this, the total abatement in the system comprises some expensive and some inexpensive efforts. Consequently, modern "Command and control" regulations are oftentimes designed in a way that addresses these issues by incorporating utility parameters. For instance, CO<sub>2</sub> emission standards for specific manufacturers in the automotive industry are either linked to the average vehicle footprint (US system) or average vehicle weight (EU system) of their entire vehicle fleet. Environmental economic regulations find the cheapest emission abatement efforts first, and then move on to the more expensive methods. E.g. as said earlier, trading, in the quota system, means a firm only abates pollution if doing so would cost less than paying someone else to make the same reduction. This leads to a lower cost for the total abatement effort as a whole.{{citation needed|date=May 2012}}
* ''[[quota on pollution|Quotas on pollution]]''. Often it is advocated that pollution reductions should be achieved by way of [[tradeable emissions permits]], which if freely traded may ensure that reductions in pollution are achieved at least cost. In theory, if such tradeable quotas are allowed, then a firm would reduce its own pollution load only if doing so would cost less than paying someone else to make the same reduction, i.e., only if buying tradeable permits from another firm(s) is costlier. These tradeable permit approaches can also, in theory, improve economic efficiency and cost-effectiveness while increasing government revenue through the use of permit auctions instead of grandfathering practices.<ref>{{Cite journal |last=Álvarez |first=Francisco |last2=André |first2=Francisco J. |date=2015-12-01 |title=Auctioning Versus Grandfathering in Cap-and-Trade Systems with Market Power and Incomplete Information |url=https://link.springer.com/article/10.1007/s10640-014-9839-z |journal=Environmental and Resource Economics |language=en |volume=62 |issue=4 |pages=873–906 |doi=10.1007/s10640-014-9839-z |issn=1573-1502|url-access=subscription }}</ref> This entails the government selling off a certain number of these tradeable permits, allowing the government to capture the value of emissions and use it to reduce marginal tax rates.<ref>{{Cite journal |last=Keohane |first=Nathaniel O. |date=2009-01-01 |title=Cap and Trade, Rehabilitated: Using Tradable Permits to Control U.S. Greenhouse Gases |url=https://doi.org/10.1093/reep/ren021 |journal=Review of Environmental Economics and Policy |volume=3 |issue=1 |pages=42–62 |doi=10.1093/reep/ren021 |issn=1750-6816|url-access=subscription }}</ref> In practice, tradeable permits approaches have had some success, such as the U.S.'s sulphur dioxide trading program or the EU Emissions Trading Scheme, and interest in its application is spreading to other environmental problems.
* ''[[Tax, tariff and trade|Taxes and tariffs on pollution]]''. Increasing the costs of polluting will discourage polluting, and will provide a "dynamic incentive", that is, the disincentive continues to operate even as pollution levels fall. A pollution tax that reduces pollution to the socially "optimal" level would be set at such a level that pollution occurs only if the benefits to society (for example, in form of greater production) exceeds the costs. This concept was introduced by [[Arthur Cecil Pigou|Arthur Pigou]], a British economist active in the late nineteenth through the mid-twentieth century. He showed that these externalities occur when markets fail, meaning they do not naturally produce the socially optimal amount of a good or service. He argued that “a tax on the production of paint would encourage the [polluting] factory to reduce production to the amount best for society as a whole.”<ref>{{Cite book|title=A little history of economics|last=Kishtainy, Niall|isbn=978-0-300-23452-7|oclc=1039849897|date=2018-02-27|publisher=Yale University Press }}</ref> These taxes are known amongst economists as [[Pigouvian tax|Pigouvian Taxes]], and they regularly implemented where negative externalities are present. Some advocate a major shift from taxation from income and sales taxes to tax on pollution – the so-called "[[green tax shift]]".
* ''Better defined [[property rights]]''. The [[Coase Theorem]] states that assigning property rights will lead to an optimal solution, regardless of who receives them, if [[transaction cost]]s are trivial and the number of parties negotiating is limited. For example, if people living near a factory had a right to clean air and water, or the factory had the right to pollute, then either the factory could pay those affected by the pollution or the people could pay the factory not to pollute. Or, citizens could take action themselves as they would if other property rights were violated. The US River Keepers Law of the 1880s was an early example, giving citizens downstream the right to end pollution upstream themselves if the government itself did not act (an early example of [[bioregional democracy]]). Many markets for "pollution rights" have been created in the late twentieth century—see [[emissions trading]]. Supply-side environmental policy implements efficiency by letting countries that are affected by climate change "[https://www.journals.uchicago.edu/doi/abs/10.1086/665405 buy coal]" or other fossil fuel reserves abroad with the intention of conserving them: Bohm (1993); Harstad (2012). According to the Coase Theorem, the involved parties will bargain with each other, which results in an efficient solution. However, modern economic theory has shown that the presence of asymmetric information may lead to inefficient bargaining outcomes.<ref>{{Cite journal|last1=Myerson|first1=Roger B|last2=Satterthwaite|first2=Mark A|date=1983|title=Efficient mechanisms for bilateral trading|journal=Journal of Economic Theory|volume=29|issue=2|pages=265–281|doi=10.1016/0022-0531(83)90048-0|issn=0022-0531|url=http://www.kellogg.northwestern.edu/research/math/papers/469.pdf |archive-url=https://web.archive.org/web/20060901154809/http://www.kellogg.northwestern.edu/research/math/papers/469.pdf |archive-date=2006-09-01 |url-status=live|hdl=10419/220829|hdl-access=free}}</ref> Specifically, Rob (1989) has shown that pollution claim settlements will not lead to the socially optimal outcome when the individuals that will be affected by pollution have learned private information about their disutility already before the negotiations take place.<ref>{{Cite journal|last=Rob|first=Rafael|date=1989|title=Pollution claim settlements under private information|journal=Journal of Economic Theory|volume=47|issue=2|pages=307–333|doi=10.1016/0022-0531(89)90022-7|issn=0022-0531}}</ref> Goldlücke and Schmitz (2018) have shown that inefficiencies may also result if the parties learn their private information only after the negotiations, provided that the feasible transfer payments are bounded.<ref>{{Cite journal|last1=Goldlücke|first1=Susanne|last2=Schmitz|first2=Patrick W.|date=2018|title=Pollution claim settlements reconsidered: Hidden information and bounded payments|journal=European Economic Review|volume=110|pages=211–222|doi=10.1016/j.euroecorev.2018.08.005|issn=0014-2921|doi-access=free}}</ref> Using cooperative game theory, Gonzalez, Marciano and Solal (2019) have shown that in social cost problems involving more than three agents, the Coase theorem suffers from many counterexamples and that only two types of property rights lead to an optimal solution.<ref>{{Cite journal|last1=Gonzalez|first1=Stéphane|last2=Marciano|first2=Alain|last3=Solal|first3=Philippe|date=2019|title=The social cost problem, rights, and the (non)empty core|journal=Journal of Public Economic Theory|volume=21|issue=2 |pages=347–365|doi=10.1111/jpet.12334|s2cid=158059174 }}</ref>
* ''Accounting for environmental externalities in the final price''. In fact, the world's largest industries burn about $7.3 trillion of free natural capital per year.<ref>{{Cite web |last=Roberts |first=David |date=2013-04-17 |title=None of the world's top industries would be profitable if they paid for the natural capital they use |url=https://grist.org/business-technology/none-of-the-worlds-top-industries-would-be-profitable-if-they-paid-for-the-natural-capital-they-use/ |access-date=2022-12-14 |website=Grist |language=en-us}}</ref> Thus, the world's largest industries would hardly be profitable if they had to pay for this destruction of natural capital. Trucost has assessed over 100 direct environmental impacts and condensed them into 6 key environmental performance indicators (EKPIs).<ref name=":0">{{Cite web |last=Joseph |date=2013-04-01 |title=Natural Capital at Risk: The Top 100 Externalities of Business |url=https://capitalscoalition.org/natural-capital-at-risk-the-top-100-externalities-of-business/ |access-date=2022-12-14 |website=Capitals Coalition |language=en-GB}}</ref> The assessment of environmental impacts is derived from different sources (academic journals, governments, studies, etc.) due to the lack of market prices. The table below gives an overview of the 5 regional sectors per EKPI with the highest impact on the overall EKPI:
{| class="wikitable"
|+Ranking of the 5 region-sectors by EKPI with the greatest impact across all EKPIs when measured in monetary terms<ref name=":0" />
!Rank
!IMPACT
!SECTOR
!REGION
!NATURAL CAPITAL COST$, BN
!REVENU$, BN
!IMPACT RATIO
|-
|1
|GHG
|Coal Power Generation
|Eastern Asia
|361.0
|443.1
|0.8
|-
|2
|Land Use
|Cattle Ranching and Farming
|South America
|312.1
|16.6
|18.7
|-
|3
|GHG
|Iron and Steel Mills
|Eastern Asia
|216.1
|604.7
|0.4
|-
|4
|Water
|Wheat Farming
|Southern Asia
|214.4
|31.8
|6.7
|-
|5
|GHG
|Coal Power Generation
|Northern America
|201.0
|246.7
|0.8
|}
If companies are allowed to include some of these externalities in their final prices, this could undermine the [[Jevons paradox]] and provide enough revenue to help companies innovate.

== Relationship to other fields ==
Environmental economics is related to [[ecological economics]] but there are differences. Most environmental economists have been trained as economists. They apply the tools of economics to address environmental problems, many of which are related to so-called market failures—circumstances wherein the "[[invisible hand]]" of economics is unreliable. Most ecological economists have been trained as ecologists, but have expanded the scope of their work to consider the impacts of humans and their economic activity on ecological systems and services, and vice versa. This field takes as its premise that economics is a strict subfield of [[ecology]]. Ecological economics is sometimes described as taking a more pluralistic approach to [[natural environment|environmental]] problems and focuses more explicitly on long-term [[environmental sustainability]] and issues of scale.

Environmental economics is viewed as more idealistic in a [[price system]]; ecological economics as more realistic in its attempts to integrate elements outside of the [[price system]] as primary arbiters of decisions. These two groups of specialisms sometimes have conflicting views which may be traced to the different philosophical underpinnings.

Another context in which [[Externality|externalities]] apply is when [[globalization]] permits one player in a market who is unconcerned with [[biodiversity]] to undercut prices of another who is – creating a [[race to the bottom]] in regulations and conservation. This, in turn, may cause loss of [[natural capital]] with consequent erosion, water purity problems, diseases, [[desertification]], and other outcomes that are not [[Pareto efficiency|efficient]] in an economic sense. This concern is related to the subfield of [[sustainable development]] and its political relation, the [[anti-globalization movement]].

{{Three pillars of sustainability}}

Environmental economics was once distinct from [[resource economics]].<ref>{{Cite web |title=THE EVOLUTION OF ENVIRONMENTAL ECONOMICS: A VIEW FROM THE INSIDE |url=https://scholar.harvard.edu/files/stavins/files/stavins_singapore_economic_review.pdf}}</ref> Natural resource economics as a subfield began when the main concern of researchers was the optimal commercial exploitation of natural resource stocks. But resource managers and policy-makers eventually began to pay attention to the broader importance of natural resources (e.g. values of fish and trees beyond just their commercial exploitation). It is now difficult to distinguish "environmental" and "natural resource" economics as separate fields as the two became associated with [[sustainability]]. Many of the more radical [[green economists]] split off to work on an alternate [[political economy]].

Environmental economics was a major influence on the theories of [[natural capitalism]] and [[environmental finance]], which could be said to be two sub-branches of environmental economics concerned with resource conservation in production, and the [[value of biodiversity]] to humans, respectively. The theory of [[natural capitalism]] (Hawken, Lovins, Lovins) goes further than traditional environmental economics by envisioning a world where natural services are considered on par with [[Capital (economics)|physical capital]].

The more radical green economists reject neoclassical economics in favour of a new political economy beyond [[capitalism]] or [[communism]] that gives a greater emphasis to the interaction of the human economy and the natural environment, acknowledging that "economy is three-fifths of ecology".<ref>Mike Nickerson. {{full citation needed|date=August 2024}}</ref> This political group is a proponent of [[Renewable energy transition|a transition to renewable energy.]]

These more radical approaches would imply changes to [[money supply]] and likely also a [[bioregional democracy]] so that political, economic, and ecological "environmental limits" were all aligned, and not subject to the [[arbitrage]] normally possible under [[capitalism]].

An emerging sub-field of environmental economics studies its intersection with [[development economics]]. Dubbed "envirodevonomics" by [[Michael Greenstone]] and B. Kelsey Jack in their paper "Envirodevonomics: A Research Agenda for a Young Field", the sub-field is primarily interested in studying "why environmental quality [is] so poor in developing countries."<ref>{{cite journal |last1=Greenstone |first1=Michael |last2=Jack |first2=B. Kelsey |s2cid=73594686 |title=Envirodevonomics: A Research Agenda for an Emerging Field |journal=Journal of Economic Literature |volume=53 |issue=1 |pages=5–42 |doi=10.1257/jel.53.1.5 |year=2015 }}</ref> A strategy for better understanding this correlation between a country's GDP and its environmental quality involves analyzing how many of the central concepts of environmental economics, including market failures, externalities, and willingness to pay, may be complicated by the particular problems facing developing countries, such as political issues, lack of infrastructure, or inadequate financing tools, among many others.<ref>{{cite book|title=Inclusive green growth the pathway to sustainable development|date=May 2012|publisher=World Bank|location=Washington, D.C.|isbn=978-0-8213-9552-3|pages=12–13|url=http://siteresources.worldbank.org/EXTSDNET/Resources/Inclusive_Green_Growth_May_2012.pdf |archive-url=https://web.archive.org/web/20120521192240/http://siteresources.worldbank.org/EXTSDNET/Resources/Inclusive_Green_Growth_May_2012.pdf |archive-date=2012-05-21 |url-status=live|access-date=15 January 2015}}</ref>

In the field of [[law and economics]], [[environmental law]] is studied from an economic perspective. The economic analysis of environmental law studies instruments such as zoning, expropriation, licensing, third party liability, safety regulation, mandatory insurance, and criminal sanctions. A book by Michael Faure (2003) surveys this literature.<ref>{{Cite book|url=https://books.google.com/books?id=3BllTj8bVX4C|title=The Economic Analysis of Environmental Policy and Law: An Introduction|last=Faure|first=Michael G.|date=2003|publisher=Edward Elgar|isbn=978-1-84376-234-8|language=en}}</ref>

== Professional bodies ==
The main academic and professional organizations for the discipline of Environmental Economics are the [[Association of Environmental and Resource Economists]] (AERE) and the [http://www.eaere.org/ European Association for Environmental and Resource Economics (EAERE)]. The main academic and professional organization for the discipline of Ecological Economics is the [[International Society for Ecological Economics]] (ISEE). The main organization for Green Economics is the [https://greeneconomicsinstitute.org.uk/ Green Economics Institute].

== See also ==
{{div col|colwidth=22em}}
*[[Agroecology]]
*[[Carbon fee and dividend]]
*[[Carbon finance]]
*[[Carbon negative fuel]]
*[[Circular economy]]
*[[Earth Economics]] (policy think tank)
*[[Eco-capitalism]]
*[[Eco commerce]]
*[[Economics of global warming]]
*[[Ecometrics]]
*[[Eco-Money]]
*[[Eco-socialism]]
*[[Ecosystem Marketplace]]
*[[Ecotax]]
*[[Energy economics|Energy balance]]
*[[Environmental accounting]]
*[[:Category:Environmental economists|Environmental economists]] (category)
*[[Environmental credit crunch]]
*[[Environmental enterprise]]
*[[Environmental Investment Organisation]]
*[[Environmental pricing reform]]
*[[Environmental tariff]]
*[[Fair trade]]
*[[Fiscal environmentalism]]
*[[Free-market environmentalism]]
*[[Green banking]]
*[[Green libertarianism]]
*[[Green syndicalism]]
*[[Green trading]]
*{{slink|Gross domestic product#Further criticisms|}}
*[[ISO 14000]] (environmental standards)
*[[List of scholarly journals in environmental economics]]
*[[Natural capital]]
*[[Natural resource]]
*[[Natural resource economics]]
*[[Principles of ecopreneurship]]
*[[Property rights (economics)]]
*[[Renewable resource]]
*[[Risk assessment]]
*[[Strategic Sustainable Investing]] (SSI)
*[[Systems ecology]]
*World Ecological Forum
{{div col end}}

=== Hypotheses and theorems ===
* [[Coase theorem]]
* [[Porter hypothesis]]

== Notes ==
<references />

== References ==
{{refbegin}}
* {{cite encyclopedia | author-link1=Allen V. Kneese | last1=Kneese | first1=Allen V. | first2=Clifford S. | last2=Russell | date=1987 | article=environmental economics | editor-last1=Eatwell | editor-first1=John | editor-last2=Milgate | editor-first2=Murray | editor-last3=Newman | editor-first3=Peter | encyclopedia=[[The New Palgrave: A Dictionary of Economics]] | volume=2 | pages=159–164}}
* {{cite encyclopedia | author-link=Robert N. Stavins | last=Stavins | first=Robert N. | date=28 February 2008 | article=environmental economics | editor-last1=Durlauf | editor-first1=Steven N. | editor-last2=Blume | editor-first2=Lawrence E. | title=[[The New Palgrave Dictionary of Economics]] | edition=2nd | publication-place=Basingstoke, UK | publisher=[[Palgrave Macmillan]] | isbn=978-0-333-78676-5 | doi=10.1057/9780230226203.0486 | article-url=http://www.dictionaryofeconomics.com/sample_article | url-status=dead | archive-url=https://web.archive.org/web/20101229144357/http://www.dictionaryofeconomics.com/sample_article | archive-date=2010-12-29}}
* {{cite journal | first1=Maureen L. | last1=Cropper | author-link2=Wallace E. Oates | last2=Oates | first2=Wallace E. | date=June 1992 | title=Environmental economics: A survey | journal=Journal of Economic Literature | volume=30 | number=2 | archive-url=https://web.archive.org/web/20100923035535/http://econ-server.umd.edu/~cropper/publications/jc22.pdf | pages=675–740 | jstor=2727701 | url=http://econ-server.umd.edu/~cropper/publications/jc22.pdf | url-status=dead | archive-date=2010-09-23}}
* {{cite journal|doi=10.1146/annurev.energy.27.122001.083429|doi-access=free|title=An intellectual history of environmental economics|year=2002|last1=Pearce|first1=David|journal=[[Annual Review of Energy and the Environment]]|volume=27|pages=57–81}}
* {{cite journal | last=Tausch | first=Arno | date=March 22, 2016 | title='Smart development': An essay on a new political economy of the environment | journal=SSRN Electronic Journal | ssrn=2752988 | issn=1556-5068 | doi=10.2139/ssrn.2752988}}
* {{cite web | author=UNEP | date=2007 | title=Guidelines for conducting economic valuation of coastal ecosystem goods and services | url=http://www.unepscs.org/SCS_Documents/Download/19_-_Technical_Publications_and_Guidelines/Technical_Publication_08_-_Guidelines_for_Conducting_Economic_Valuation_of_Coastal_Ecosystem_Goods_and_Services.html | archive-url=https://web.archive.org/web/20080905192942/http://www.unepscs.org/SCS_Documents/Download/19_-_Technical_Publications_and_Guidelines/Technical_Publication_08_-_Guidelines_for_Conducting_Economic_Valuation_of_Coastal_Ecosystem_Goods_and_Services.html | url-status=usurped | archive-date=September 5, 2008 |id=UNEP/GEF/SCS Technical Publication No. 8}}
* {{cite web | author=UNEP | date=2007 | title=Procedure for determination of national and regional economic values for ecotone goods and services, and total economic values of coastal habitats in the context of the UNEP/GEF Project entitled: "Reversing environmental degradation trends in the South China Sea and Gulf of Thailand" | url=http://www.unepscs.org/SCS_Documents/Download/14_-_South_China_Sea_Project_Knowledge_Documents/South_China_Sea_Knowledge_Document_on_the_Economic_Valuation_of_the_Goods_and_Services_of_Coastal_Habitats.html | archive-url=https://web.archive.org/web/20080706034525/http://www.unepscs.org/SCS_Documents/Download/14_-_South_China_Sea_Project_Knowledge_Documents/South_China_Sea_Knowledge_Document_on_the_Economic_Valuation_of_the_Goods_and_Services_of_Coastal_Habitats.html | url-status=usurped | archive-date=July 6, 2008 | id=South China Sea Knowledge Document No. 3. UNEP/GEF/SCS/Inf.3}}
*{{cite book|url=https://eclass.unipi.gr/modules/document/file.php/NAS247/tselepidis/ATT00106.pdf |archive-url=https://web.archive.org/web/20180618102355/https://eclass.unipi.gr/modules/document/file.php/NAS247/tselepidis/ATT00106.pdf |archive-date=2018-06-18 |url-status=live|edition=3|author=Perman, Roger|display-authors=etal|isbn=978-0-273-65559-6|year=2003|title=Natural resource and environment economics|publisher=Pearson}}
* {{cite book | last=Field | first=Barry | title=Environmental economics: An introduction | publisher=McGraw-Hill | location=New York, NY | year=2017 | isbn=978-0-07-802189-3 | oclc=931860817 }}
* {{Cite journal |last=Sandmo |first=Agnar |date=2015 |title=The Early History of Environmental Economics |url=https://www.journals.uchicago.edu/doi/10.1093/reep/reu018 |journal= Review of Environmental Economics and Policy|volume=9 |pages=43–63 |doi=10.1093/reep/reu018 |hdl=11250/194577 |hdl-access=free |url-access=subscription }}
{{refend}}

== Further reading ==
{{refbegin}}
* {{cite book | last=Anderson | first=David A. | date=June 30, 2024 | title=Environmental Economics and Natural Resource Management | edition=6th | publication-place=London | publisher=Routledge | isbn=978-1-032-55039-8 | doi=10.4324/9781003428732}}
* Balboni, Clare; Shapiro, Joseph S. (2025), Donaldson, Dave; Redding, Stephen J. (eds.), "Spatial environmental economics☆", Handbook of Regional and Urban Economics, Handbook of Regional and Urban Economics, vol. 6, Elsevier, pp. 585–652.
* {{cite book | last=Banzhaf | first=H. Spencer | date=October 31, 2023 | title=Pricing the priceless: A history of environmental economics | publisher=Cambridge University Press | isbn=978-1-108-86718-4 | doi=10.1017/9781108867184}}
* {{cite journal | last=Kumekawa | first=Ian | date=June 1, 2024 | title=Measuring the Cost of Pollution: Economic Life, Economic Theory, and the Origins of Environmental Economics | journal=The Journal of Modern History | volume=96 | issue=2 | issn=0022-2801 | doi=10.1086/730038 | pages=332–361}}
{{refend}}

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