Environmental economics is the branch of economics that studies the effects of environmental policies.
Environmental economics is also responsible for studying the best way to regulate economic activity to reduce environmental impact and the importance of doing so. The beginnings of these studies date back to the 1950s. Although the idea of taxes by externalities had been raised by Pigou in 1920. Later, from the 1970s, the discipline was consolidated.
It can be said that there are two classic sources of environmental degradation: population growth and economic growth. Both elements, by maintaining positive growth rates, increasingly generate greater demand for natural resources. However, controlling birth and growth rates, as proposed by Malthus, entails ethical problems, so the solution must be different. That said, it is necessary to emphasize that there is an acceptable optimal contamination level.
Market economy and the environment
Economic analysis suggests that a market economy generates failures that can be solved with intervention. In other words, there is a difference between social benefit and private benefit when generating pollution problems. Also, this difference is reflected on the cost side (social cost and private cost).
In environmental economics, one of the forms of intervention could be environmental regulations. Therefore, this branch of economics may not be compatible with the classical view. These pro-market systems did not take externalities into account, therefore, they do not maximize human well-being. Despite this, the fallacy that the market economy is contrary to the environment cannot be assumed to be true.
Environmental economics and externalities
Externalities occur when economic agents do not have to bear all the costs of the activity they carry out. For example, carriers do not have to bear pollution costs from fuel use.
Faced with this problem, they have tried to find solutions so that agents internalize the costs of the pollutants they generate. Some of the suggested policies are:
- Taxes: For example, a fuel tax could be applied. Also, these taxes can be progressive, the more pollution the higher the tax.
- Transferable emission permits: These would allow the bearer to emit a certain amount of pollutants. Permits can be issued by a multilateral body or only at the national level. In both cases, these could be negotiated by those who have surpluses.
- Abatement subsidies: Subsidies given to companies to reduce the amount of pollutants they expel.
- Emission standards: Individual limits allowed by industry can be set.
- Technological standards: The implementation of technological devices is required to reduce pollution. For example, extractors.
Environmental Kuznets Curve
From the study of these policies, hypotheses such as the Kuznets Curve emerge. This is one of the main hypotheses that allows establishing the relationship between economic growth and environmental deterioration.
The image shows how economic growth in emerging economies generates more pollution. This could be in a pre-industrialization stage. It is characterized by the exploitation of natural resources, for example.
Later, and reached a certain level of income, it begins to decrease. This occurs in a post-industrialization stage. In this case, caused by the use of cleaner energy and the development of the service industry, for example.