After reading this essay you will learn about:- 1. Concept of Environmental Economics 2. Environmental Goods 3. Economics of Pollution Control 4. Environmental Accounting.
Essay on the Concept of Environmental Economics:
An economy is a system of production, distribution and consumption of economic goods—any material items or services that satisfy people’s needs. In an economy, individuals, businesses, and societies make economic decisions about what goods and services to produce, how to produce them, how much to produce, how to distribute them, and what to buy and sell.
ADVERTISEMENTS:
“Environmental economics”, a specialised branch of economics, has evolved in relatively recent years.
It embraces the issue of pollution control, climate change, protection of natural environment, conservation of scarce resources, biodiversity and economic instruments—issues in the resolution of which market policy takes little or no part, but in which vast natural assets need to be allocated sensibly to the common good.
The kinds of capital used in an economy to produce material goods and services are called economic resources.
They fall into three categories:
(a) Earth Capital or Natural Resources:
(viz., plants, air, water and land, nutrients and minerals, biotic resources).
ADVERTISEMENTS:
(b) Manufactured Capital:
These include tools, machinery, equipment’s, etc.
(c) Human Capital:
People’s physical, intellectual and mental talents.
ADVERTISEMENTS:
There are two major types of economic systems—centrally planned economy, and market-based or pure command economic system. Virtually all economics seek economic growth, an increase in the capacity of the economy to provide goods and services for people’s final use.
Such growth is usually accomplished by maximising the flow of matter and energy resources (throughout) by means of population growth (more consumers), more consumption per person, or both.
Economic growth is usually measured by the increase in a country’s Gross National Product (GNP). Economists have never claimed that GNP indicators are good measures of environmental health and human welfare, but most governments and business leaders use them that way.
One of the chief tools cooperation’s and governments use in making economic decisions is cost- benefit analysis. This approach involves comparing the estimated short term and long term costs (losses) with estimated benefits (gains) for various alternative courses of action. Cost-benefit analysis can be useful guides for action and can indicate the cheapest way to go, but they can also be misused.
Environmental Goods:
ADVERTISEMENTS:
All environmental goods viz., climate protection, forest water, soil, nutrient cycle etc. are public goods, because its provision is both non-rival and non-excludable. These public goods may be local public good (i.e., abatement effort to clean up the river) or global public good (i.e., abatement effort to reduce carbon emissions feared to induce climate change).
Public goods represent another form of market failure. Climate change is the classic example of a market failure: the flow of GHG emission accumulates into a global carbon stock that poses the risks to humanity. The GHGs remain in the atmosphere for hundreds of years.
GHG concentration neglect long-term emissions; changes in any one years emissions have a trivial effect on current overall concentrations. Even significant reductions in emissions made today will not be evident in atmospheric concentrations for decades or more.
In case of a public good the individual takes the place of free rider. The individual may well use the good, but may not be willing to contribute to the cost of production/protection. Hence the problem of assessing the marginal valuation arises.
To overcome such problems, the following approaches can be undertaken by the government agencies:
i. The use of social welfare functions should be made and the environmental quality can be determined by maximising the function;
ii. Government agencies should work with CBOs to ensure that basic infrastructures and basic services are provided, maintained particularly in the area of health promotion and environmental protection.
iii. Waste reduction, reclamation or reuse should be encouraged by using participatory community based schemes.
Economics of Pollution Control:
Most economists agree that controlling or preventing pollution and reducing resource waste require government intervention in the market place. Such governmental action can take the form of regulation, the use of market forces, or some combination of these approaches.
Regulation is a command and control approach that involves passing and enforcing laws that set pollution standards, establish deadlines and penalties, regulate harmful activities, ban the release of toxic chemicals into the environment and require that certain irreplaceable or slowly replenished resources be protected from unsustainable use or from any use at all.
Market forces can be used to improve environmental quality and reduce resource waste, mostly by using methods that encourage the internalisation of external costs.
Another market approach is for the government to grant tradable pollution and resource use right. Identically, market-based approach is also to enact green taxes or effluent fees that would help internalise many of the harmful external costs of production and consumption.
This method could include taxes on each unit of pollution discharged into the air or water, each unit of hazardous or nuclear waste produced, each unit of specified virgin resources used, each unit of pesticide use, each unit of fossil fuel used and each unit of solid waste produced; charging user fees is another market-based method.
Another market approach would require business to post a pollution prevention bond when they open a mine, plant, incinerator or landfill. After a set length of time, the deposit (with interest) would be returned minus actual or estimated environmental costs.
All these approaches described above have a number of advantages and disadvantages (Table 42.1):
Should not our goal be zero pollution? Ideally, Yes, in the real world, Not necessarily.
First, natural processes can handle some of our wastes, so long as we don’t destroy, degrade, or overload these processes.
Second, as long as we continue to rely on pollution control, we can’t offer zero pollution.
After we have removed a certain proportion of the pollutants in air, water or soil, the clean-up cost per additional unit of pollutant rises sharply. Beyond a certain point, the clean up costs exceed the harmful costs of pollution.
To find the break-even point, economists plot two curves, a curve of the estimated economic costs of cleaning up pollution and a curve of the estimated social (external) costs of pollution. They then add the two curves together to get a third curve showing the total costs.
The lowest point on this third curve is the break-even point or optimal level of pollution (Fig. 42.1). However, the environmentalists and business leaders often disagree in their estimates of the harmful costs of pollution.
Thus environmentalists believe that many environmental laws should be modified to place greater emphasis on pollution prevention, which avoids most of the regulatory problems and excessive costs of end of pipe pollution control.
Subsequently, in recent years, environmentalists justify their concerns by pointing out that the existing FTA, NAFTA and WTO trade agreements have lowered some environmental standards. Thus there is a need for making environmental concerns a key part of all trade agreements and of all loans made by international lending agreements.
One of the potent method of pollution management is the imposition of pollution takes. Many European countries imposes such kinds of direct pollution taxes under polluter pay principles. An alternative approach to pollution taxes as a way of achieving a target reduction in pollution is that of tradable pollution permits (TPPs).
The main idea behind TPPs is to allocate such rights, and make them tradable. This results in giving a market the right to pollute and consequently in the emergence of a market price for this right. Carbon dioxide trading is such type of TPP.
Thus tradable pollution permits and pollution taxes are both capable, in theory, of achieving the least-cost solution to pollution control problems. “Carbon taxation”, at a domestic level, is undoubtedly one tool with which policymakers will wish to tackle climate change.
In its simplest state, taxation could address the externally by levying a uniform tax on all sources of CO2 emissions at a rate equal to the damage caused by each tonne emitted. “Carbon credit” is a new concept devised by public and private entities.
The concept involves buying carbon units (tons), through a middle entity that aggregates contracts from many farmers who meet the criteria of carbon sequestration through adoption of a range of conservation practices. The carbon units are then sold to a buyer in the industrial sector needing to offset the CO2 generated to the atmosphere through their manufacturing activities.
The concept of carbon credit trading seeks to encourage countries to reduce their GHG emissions, as it rewards those countries which meet their targets and provides financial emissions, as it rewards those countries which meet their targets and provides financial incentives to others to do so as quickly as possible.
Surplus credits can be sold in the global market. One credit is equivalent to one tonne of CO2 emission reduced. Carbon credits are available for companies engaged in developing renewable energy projects that offset the use of fossil fuels.
Environmental Accounting: Natural Resources:
Introduction:
Accounting of Natural Resource, i.e., incorporating environmental criteria in economic analysis, is gaining importance day by day in the entire world and the environmentalists are particularly concerned about the depletion and degradation of natural resources as also about the harmful impacts of economic activities.
A number of groups have been constituted—both at national and international levels—to look into the problems arising out of unmindful handling of natural resources and a few countries are already preparing the Integrated Accounts taking into account the depletion, degradation and other harmful impacts of economic activities.
Presently, the economic development of a country or a region is generally expressed in terms of the growth indicated by national income accounts which present systematic statistical statements reflecting the value of final goods and services produced in the economy during a particular year including change in stock.
The System of National Accounts (SNA) takes into consideration only the economic activities within the specified production boundary and records only man-made assets as productive capital. The capital which is used up is written off as consumption of fixed capital against the value of production.
Present System of National Accounts does not keep proper account of natural assets—namely land, minerals, water and forest—in the sense that they are included in the SNA boundary insofar as they are under the effective control of any institutional unit. The cost of their use is not explicitly accounted for in production cost.
It is well-known that these natural resources are much more important than the man-made resources since, once used-up. these will not be available to future generations for further production.
Day by day the need to have a set of accounts which provide information about the utilisation of these natural resources in a proper way is being increasingly felt and a number of countries have hence initiated to start with on an experimental basis, the exercises of preparing estimates which take into account the details of utilisation of the Natural Resources.
The conventional system of national accounting suffers from two drawbacks: one, the neglect of new scarcities of natural resources which threaten the sustained productivity of the economy and two, the degradation of environmental quality, mainly from pollution and consequential effects on human health and welfare.
In addition, some expenditures for maintaining environmental quality are accounted as increases in national income and product, despite the fact that such outlays could be considered as a maintenance cost to society, rather than social progress.
In Natural Resource Accounting, attempt is made to convert these impacts in monetary terms.
Thus the Natural Resource Accounting, when properly done, may present a completely different picture of the economy in the sense that an economy which might have been considered as a progressive economy on the basis of National Accounts may turn out to be an economy with zero or negative growth—if the depletion, degradation and other harmful impacts of economic activities are taken into account.
National Accounts Statistics (NAS) in India as on date are compiled following the guidelines set out in the United Nations System of National Accounts (SNA), 1968. Details of data sources used and methodology adopted are given in the Central Statistical Organisation (CSO) publication—National Accounts Statistics: Sources & Methods, 1989.
India is in the process of revising its national accounts series from the present base 1980-81 to 1990-91 and also simultaneously to adopt, to the extent feasible, the revised System of National Accounts, 1993 (1993 SNA), prepared under the auspices of the Inter- Secretariat Working Group on National Accounts comprising Commission of the European Communities- Eurostat, International Monetary Fund, Organisation for Economic Cooperation and Development, United Nations and World Bank.
The revised System is a comprehensive, consistent and flexible set of macro- economic accounts intended to meet the needs of government and private sector analysts, policymakers and decision-takers. The 1993 SNA embodies the results of harmonizing the SNA with other international statistical standards. It recommends preparation of sequence of accounts comprising Current and Accumulation Accounts.
Production Boundary of 1993 SNA:
The production boundary of the System of National Accounts defines the range of economic activities recorded in the production accounts. Only the activities falling within the production boundary are considered to create output and value added. The production boundary not only defines what is production and what is not, but also determines indirectly what is income, consumption, investment, etc.
For example, only the output generated within the production boundary could be consumed, invested, exported, etc. In general terms, production may be described as an activity in which an enterprise uses inputs to produce outputs. Thus purely natural process—for example the unmanaged growth of fish stocks in the international waters—is not production, whereas the activity of fish farming is production.
The production boundary of the 1993 SNA includes:
(i) The production of all individual or collective goods or services that are supplied to units or intended to be so supplied, including the production of goods and services used up in the process of producing such goods and services;
(ii) Own-account production of all goods that are retained by their producers for their own final consumption or gross capital formation;
(iii) Own-account production of housing services by owner-occupiers (ownership of dwellings) and of domestic and personal services produced by employing paid domestic staff.
The 1993 SNA includes the production of all goods within the production boundary. At the time the production takes place it may not even be known whether or not, in what proportions, the goods produced are destined for the market or for own use.
With regards to own account production of goods by households, the 1993 SNA has removed the 1968 SNA limitations which excluded the production of goods not made from primary products, the processing of primary products by those who do not produce them and the production of other goods by households who do not sell any part of them on the market.
Towards an effort to compile the Environmental Economic Accounts, cost of use of all assets are to be accounted for which conventionally are not within the SNA asset boundary. In this context it is important to first describe the asset boundary of 1993 SNA.
Assets Boundary of 1993 SNA:
Assets—as defined in the 1993 SNA—are entities that must be owned by some unit or unit(s) and from which economic benefits are derived by their owner(s) by holding or using them over a period of time. Every economic asset must function as a store of value that depends upon the amounts of the economic benefits that its owner can derive by holding or using it.
With regard to the classification of assets, the 1993 SNA distinguishes at the first level of the classification between non-financial assets and financial assets/liabilities. Within non-financial assets, it distinguishes between produced and non-produced assets and within each of these between tangible and intangible assets.
Produced assets are defined as non- financial assets that have come into existence as outputs from processes that fall within the production boundary of the system.
This includes not only tangible fixed assets but also intangible fixed assets such as mineral exploration, computer software, entertainment, literary or artistic originals etc. Non-produced assets are defined as non-financial assets that have come into existence in ways other than the process of production.
This includes tangible non-produced assets like land, sub-soil assets, etc. and intangible non- produced assets like patented entities, leases and other transferable contracts, purchased goodwill and other intangible non-produced assets.
Gross Fixed Capital Formation:
Gross Fixed Capital Formation (GFCF) is measured by the total value of a producer’s acquisition, less disposal, of fixed assets during the accounting period plus certain additions to the value of non-produced assets realised by the productive activity of institutional units.
Fixed assets are those tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly or continuously in other processes of production for more than one year. There is substantial diversity in the different types of gross fixed capital formation that may take place.
The following main types may be distinguished:
(a) Acquisitions, less disposals, of new or existing tangible fixed assets, subdivided by types of asset into:
(i) Dwellings,
(ii) Other buildings and structures,
(iii) Machinery and equipment,
(iv) Cultivated assets—trees and livestock—that are used repeatedly or continuously to produce products such as fruit, rubber, milk etc.
(b) Acquisition, less disposal, of new and existing intangible fixed assets, sub-divided by type of assets into:
(i) Mineral exploration,
(ii) Computer software,
(iii) Entertainment, literary or artistic originals,
(iv) Other intangible fixed assets.
(c) Major improvements to tangible non-produced assets, including land,
(d) Costs associated with transfers of ownership of non-produced assets.
Various components of acquisitions and disposals of mixed assets, as referred to in categories (a) and (b) above, are:
(i) Value of fixed assets purchased,
(ii) Value of fixed assets acquired through barter,
(iii) Value of fixed assets received as capital transfers in kind,
(iv) Value of fixed assets retained by their producers for their own use, including the value of any fixed assets being produced on own account that are not yet completed or fully mature,
Less:
(v) Value of existing fixed assets sold,
(vi) Value of existing fixed assets surrendered in barter,
(vii) Value of existing fixed assets surrendered as capital transfers in kind.
Acquisition of new assets covers not only complete assets but also any renovations, reconstruction or enlargements that significantly increase the productive capacity or extent the service life of an existing asset. In recognition of the newly increased capacity or newly extended service life, these improvements are treated as part of acquisitions of new assets even though physically they function as part of existing asset.
Items (v), (vi) and (vii) above include disposals of assets that may cease to be used as fixed assets by there new owners: for example, vehicles sold by businesses to households for their personal use or assets that are scrapped or demolished by their new owners.
The 1993 SNA includes a third category of capital formation called “acquisitions less disposals of valuables”. Valuables are defined as goods of considerable value that are not used primarily for purposes of production or consumption but are held as stores of value over time.
The economic benefits that valuables bring are that their values are not expected to decline relatively to the general price level. They consist of precious metals and stones, jewellery, works of arts, etc.
Not all GFCF consists of acquisition less disposals of fixed assets. It is, therefore, convenient to describe the other components of gross fixed capital formation i.e., major improvements and costs of ownership transfers, as these may involve any type of assets.
Classification of assets mentioned above may be summarised in Fig. 42.2:
Tangible non-produced assets are natural assets and these are available to the humankind as natural resources. Classification of natural resources has been dealt with in environmental literature (Judith Rees, 1985). In 1993 SNA the environmental analysis has been dealt with as a functionally oriented satellite account.
The main central accounting framework has not been disturbed. A System of Environmental Economic Accounts (SEEA) has been developed by the UN and presented in the handbook Integrated Environmental and Economic Accounting.
There are three approaches to Environmental Accounting:
(i) Natural Resource Accounting in Physical Terms
(ii) Environmental Accounts in Monetary Terms
(iii) Welfare and Similar Approach as elaborated below.
Natural Resource Accounting in Physical Terms:
This approach focuses on the physical asset balances i.e., Opening and Closing Stocks and changes therein of materials, energy and natural resources. It may also include changes in environmental quality of natural assets in terms of environmental (quality) indices. The SEEA, which shows the links between physical and monetary accounts, includes natural resource accounts as a module.
Environmental Accounts in Monetary Terms:
This approach identifies the actual expenditure on environmental protection and deals with the treatment of environmental cost of natural and other assets caused by production activities in the calculation of net product. This approach is generally more limited in coverage than physical resource accounting.
In monetary approach the GDP is adjusted for selected environmental costs like the cost of oil depletion, deforestation, depletion of fish stock and cost of soil erosion etc.
Welfare and Similar Approach:
This approach deals with the environmental effects borne by individuals and by producers other than the ones causing these effects. The effects on individuals and on others (that the producers) may be much larger than the cost caused and do not affect net product but rather net income through transfers of environmental services.
The approach considers free environmental services provided by nature to producers and consumers and the subsequent damages borne by them. The environmental services provided free and the damages borne are considered as transfers by and to nature which increase or decrease environmentally adjusted net national income.