Environmental Issues

Dr. Katherine Sauer

Global Economic Issues
ECON 241
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 Environmental Issues

How is the environment a global economic issue?

Many economic activities are based on natural resources.

Many economic activities directly or indirectly impact the

environment.

Transboundary Externalities:
One countrys actions can affect another countrys environment.

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I. Some International Environmental Problems

A. pollution
- litter, trash, sewage, oil spills, emissions, radiation,

In the 1980s, firms in environmentally strict nations shipped waste

to developing countries.

1989 Basel Convention goals:

1. decrease the generation of hazardous waste
2. dispose of waste close to the place of production
3. decrease the movement of hazardous waste

2001 Stockholm Convention:

- agreement on the 12 most dangerous pollutants
- highly injurious, spread easily, more concentrated
as they move up the food chain 3
On the issue of pollution, an international consensus has been
reached. This is attributed to:
- many countries already had domestic pollution laws
- there is no doubt about the harm of pollution

The economics of pollution

Pollution is an example of a negative externality.

externality: an uncompensated impact on a bystander

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ex: A power plant burns coal to produce electricity and as a result,
sulfur dioxide (SO2) is emitted into the air.

SO2 emissions contribute to health problems and it is a key

component in acid rain.

The power plant does not compensate the people who develop
health problems or face the effects of acid rain.

The firm does not bear the true cost of production.

- there are external costs to the firms actions

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 The market outcome
Social Costs occurs where PC =
Price PB.
Private Costs (S)

But the SC of
production are
psocial
greater than the PC.
pmarket
In this case, the PB
and SB are equal.
Private
Benefits (D) The socially optimal
= Social Benefitslevel of production
Qsocial Qmarket Q of megawatt hours
is lower and the
price is higher.

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 How could we get
Social Costs the firm to produce
Price the socially optimal
Private Costs (S)
amount?
tax
Make the firm bear
psocial
the true cost of their
pmarket actions.
- tax the firm

The tax should be

equal to the
D difference between
Qsocial Qmarket Q of megawatt hours
social and private
costs.

When the market is corrected so the firm bears the full cost of its
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actions, we have internalized the externality.
Many economists advocate a carbon tax as a way to reduce
greenhouse gas emissions.
- price rises!!! ---- unpopular politically

[Note: economists would not advocate a pollution level of zero

- produce/pollute to the point where the social costs of
the activity are equal to the social benefits from the activity]

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Although the economic approach is to get polluters to pay for the
waste that they generate, governments often take a different
approach.

command-and-control approach: the government commands each

firm to produce no more than a certain volume of pollution and
specifies the pollution-control technique that must be used

usually not the most efficient approach:

- different firms often face very different abatement costs
- abatement technology that is efficient for one firm may
not be efficient for another
- no incentive to decrease pollution below the level
mandated by the government

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cap-and-trade approach: the government selects a particular
pollution target then issues just enough permits to meet the
target and allows firms to buy and sell the permits among
themselves

- firms can select the method that they use for abatement
- firms with relatively lower costs associated with abatement can
reduce pollution more and sell their additional permits
- firms with relatively higher costs associated with abatement
can purchase permits from firms with lower costs
- the level of the pollution can be lower than the target

The government sets the level of acceptable pollution and the

market leads to the most efficient way of achieving that
pollution level.

The pollution level can be reduced over time. 10

 Emissions trading market The government
determines the number of
Price S permits.

The market determines

the price of a traded
permit.
P*

1000 # of permits in the

market

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 What if an environmental
group purchases some
Price S2 S permits and instead of
releasing CO2, pulls the
permit out of the market?
P2

P*

900 1000 # of permits in the

market

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 Suppose two firms both produce CO2 as a by-product of their
production process. Each firm faces a different marginal
abatement cost (MAC). [ex: cheaper for Firm 1 to reduce
emissions] Firm 1 Firm 2
MAC MAC
($/unit) ($/unit)
MAC

MAC

reduction of reduction
13 of
emissions emissions
The emissions trading market determines the price of a permit P*.

Individual firms take this price as given.

Firms are given an initial allocation of permits.

If the price of buying a permit is less than the cost of abatement, the
firm will choose to buy a permit instead of reducing pollution.

If P* < MAC, then buy permits and dont reduce pollution.

If P* > MAC, then reduce pollution and sell any extra

permits.

When P* = MAC, the firm is at its optimal abatement level.

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 R* is the optimal reduction for each firm.

Firm 1 Firm 2
MAC MAC
($/unit) ($/unit)
MAC

MAC
P*
P*

reduction of reduction
15 of
R* R*
emissions emissions
 The government sets a pollution target and each firm has to reduce
emissions to at least Rreq.

Firm 1 Firm 2
MAC MAC
($/unit) ($/unit)
MAC

MAC
P*
P*

reduction of reduction
16 of
Rreq R* R* Rreq
emissions emissions
 For Firm 1, the Rreq < R*. Also, at Rreq the MAC < P.
This firm could make some money by reducing emissions and
selling permits.
Firm 1 Firm 2
MAC MAC
($/unit) ($/unit)
MAC

gains from
selling permits
MAC
P*
P*

reduction of reduction
17 of
Rreq R* R* Rreq
emissions emissions
 For Firm 2, the Rreq > R*. Also, at Rreq the MAC > P.
This firm is better off reducing emissions to R* and then buying
permits.
Firm 1 Firm 2
MAC MAC
($/unit) ($/unit)
MAC

savings from
gains from buying permits
selling permits instead of reducing
MAC emissions
P*
P*
spending on
permits

reduction of reduction
18 of
Rreq R* R* Rreq
emissions emissions
The US has a SO2 trading system (1990 clean air act).

Chicago: Emissions Reduction Market System (2000)

European Union Emissions Trading Scheme

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B. Ozone Depletion

Ozone is an invisible poisonous gas that exists in trace amounts in

the stratosphere.
- shields the earth from 95-99% of the suns harmful UV rays

Early in the 20th century, chlorofluorocarbons were discovered.

These wonder gases had uses in refrigerators, air conditioners,
aerosol spray cans, solvents, foam, and fire extinguishers.
- linger for 50 1,700 years
- the chlorine in CFCs reacts with ozone and breaks it up into
oxygen

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There has been a net decrease in the level of global ozone. The main
cause is emissions from man-made sources of halocarbons.

In 1987, the Montreal Protocol introduced tough guidelines for

decreasing the use of ozone-depleting substances.
- amended several times as new research comes out
- separate phase-out schedules for developed and developing
nations
- ozone layer is expected to recover by 2050

On the issue of ozone depletion, there is an international consensus.

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C. Wildlife Issues

1. trade in animals --- large and lucrative industry worldwide

legal: billion dollar industry trading millions of animals

illegal: rare/endangered animals are transferred from the

wild in developing nations to buyers in developed nations
- medicines, fur, food, pets

ex: in Brazil it is estimated that 38 million animals are

stolen each year from the forest ($1billion)

ex: in US, Brazilian jaguar skin = $20,000

Lears Macaw parrot = $60,000

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The Tragedy of the Commons

A common resource is a good that every one has access to but

is not unlimited in quantity.
ex: fish in the ocean

The tragedy of the commons illustrates that when private

incentives differ from social incentives, a common resource will
be exploited.
- private incentive is often to take as much as possible
- social incentive is to conserve the resource and only
take as much as is sustainable

Two issues to consider:

- animals with commercial value
- amimals without commercial value
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If the animal has commercial value, then there are several
economic solutions to the tragedy:
- tax
- permits
- privatize property rights

Increasingly, attempts to protect animals conflict with human land

use.
ex: the spotted owl

International strategy:
1973 Convention on International Trade in Endangered Species
- trade is not allowed for products from endangered species
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The case of the sea turtle:

Sea turtles are endangered.

The sea turtle is a common resource with commercial value and

has been exploited.
- low fat, high protein meat (tasty)
- leather is attractive
- shell for jewelry
- oil in cosmetics

A contributing factor is the destruction of its habitat.

- turtles live in places where humans like to vacation

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Solution: In the 1970s, a ban was placed on global trade in sea
turtle products.

But the sea turtle remains endangered!

A possible solution:
- lift the ban on trade but regulate the industry
- deal with habitat destruction issues

If trade were legal, wouldnt the sea turtle become exploited

further?

In the 1960s, in the Cayman Islands, a sea turtle farm was started.
- harvested mature turtles for profit
- raised babies and released them into the wild
- after a time, proved to be viable, profitable, and sustainable
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2. Spread of invasive species

invasive species = species that invade ecosystems beyond their

historic range

They often spread through economic activity.

ex: Burmese pythons in Florida

There is currently no international strategy to deal with this issue.

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D. Destruction of Ecosystems

Some ecosystems arent under the control of any one nation.

Who is responsible for protecting them?

Some are controlled by one nation. What if that nation doesnt

have the desire or resources to protect it?

1. Oceans
- Used for economic activity, recreation, and sustenance by
many people in many nations
- tragedy of the commons issues
- pollution
- unsustainable consumption of living marine
resources

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2. Desertification
- Caused by climate variations and human activities
- untouched lands that suffer from drought generally
recover on their own
- when stressed by human economic activity, areas often
do not recover
- over-cultivation
- over-grazing
- deforestation

Results:
- loss of primary resources (topsoil, vegetation, crops)
- land cant support people
- famine starves people and animals
- displacement of people and economic disruption

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The UN reports that drought and desertification threaten the
livelihood of 1 billion people in 110 countries.

Land based ecosystems are usually contained in one or a few

countries.

E. Climate Change

There is a lot of controversy regarding this topic.

Energy issues are the driving factor for many nations.

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Kyoto Protocol (address greenhouse gasses)

84 countries agreed to decrease CO2 emissions by 5-7% from 1990

levels by 2008-2012.

Many countries have not ratified the agreement.

US refused:
- How serious is climate change?
- Energy prices will go up if we use less coal-fired
electricity (Americans in general are not willing to drive
less)
- Emission reductions should be done within the context of
the economy
- greenhouse gas intensity = emissions per unit of GDP
- Developing nations have weaker restrictions (China!!!)

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II. Trade and the Environment

Trade and the environment are clearly linked.

1. There are potential conflicts between rules and domestic

regulations regarding environmental issues.

Trade vs Environment:
Round 1: The Tuna-Dolphin Case
Round 2: The Shrimp-Turtle Case

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Round 1: Tuna Dolphin case
In 1990, Congress created the highly popular dolphin-safe tuna
consumer labeling program.

An embargo was placed on tuna imports from countries not using

dolphin-safe methods.

Mexico and Venezuela used the GATT to challenge the US in 1991

and 1992.

The GATT panel ruled that the US embargo was in violation of

international trade rules.
- a country cant block the importation of something that
does not harm the environment itself, even if it was
produced in a way that did harm the environment

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In 1995, to avoid WTO sanctions, the US met with representatives
from the embargoed countries.
- called the Panama Declaration
- lifted embargo on tuna imports
- established dolphin kill levels
- re-examined the term dolphin-safe

Round 2: Shrimp Turtle Case

In 1991, the US banned imports of shrimp that are caught on boats
without turtle excluder devices.

In 1996, Malaysia, India, Pakistan, and Thailand brought a

complaint to the WTO.
- violated the free movement of goods
- violated non-discrimination

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In 1998, the WTO ruled that the US had the right to ban imports.
But,
- the US failed to undertake serious negotiations with its
trade partners prior to placing the ban
- different phase-in periods for the turtle excluder devices
were set (4 months to 3 years)

So, the US started allowing imports of shrimp are allowed on a

shipment-by-shipment basis.

Also, negotiations were held with the affected countries.

Malaysia still fought to have the ban lifted.

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There is no end in sight to the trade-environment cases.

As global economic integration intensifies, so does the potential

for conflict.

types of domestic regulations that may shape trade flows:

- public health standards
- food safety requirements
- emissions limits
- waste management and disposal rules
- packaging and recycling regulations
- labeling policies

Trade liberalization constrains regulatory flexibility.

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 2. Trade, Economic Growth, and Environmental Risks

The Environmental Kuznets Curve

In the early stages of
pollution

economic development
(low GDP per capita),
environmental conditions
tend to worsen as the
economy grows.

Conditions start to
improve once nations hit
middle income levels.
GDP per capita

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 Analysis suggests that the Kuznets curve relationship holds true
for air and water pollution, as well as sulfur dioxide and nitrogen
oxide.

However, for spatial or temporal problems, it does not seem that

any country has reached the downward sloping portion of the
curve.
pollution

GDP per capita 39

three effects of economic growth on trade and the environment:
1. technique effects
- as wealth increases, trade expands access to better
technologies and environmental best practices

2. composition effects
- as wealth increases, peoples preferences shift toward
greener goods

3. scale effects
- more wealth makes greater consumption possible, which
increases economic activity and therefore increases
pollution

Even if increased trade and economic growth can be accomplished

without harming the environment, there is no guarantee that they
wont harm it. 40
3. The Political Economy of Trade Liberalization

A. Reasons to link trade policy with the environment

There is already a growing number of people who are anti-free

trade. Dismissing environmental concerns could cause an even
bigger backlash.

Many mainstream environmentalists support freer trade if they feel

that pollution and natural resource management concerns are being
taken seriously.

Empirical evidence suggests that environmental linkages do not

detract from free trade agreements.

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B. Arguments for separating trade and environmental policy

Trade protectionism might be masquerading as environmental

protection.

Trade liberalization may grind to a halt under the weight of

environmental burdens.

Why should trade measures be used to enforce environmental

issues anyway? Shouldnt environmental policy tools be used?

High income countries may impose their high standards on

developing nations depriving them of comparative advantage.

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C. Psychological Spillovers and Ethical Preferences

When environmental harms are localized, do physically

unaffected people have a right to intervene?
- save the rainforest!

Many economists are skeptical of psychological spillovers.

But many people consider themselves to personally be a part of

the global community.

Are the environmental standards that exist in developing nations

truly the will of the people there?

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When is policy in another country a choice, worthy of respect
and acceptance in a diverse world? When does it become a
violation of a moral minimum standard?

If environmental harms are purely local in scope, then trade

policy shouldnt be used to enforce environmental policy.

If environmental harms are vast or there is reason to doubt that

the will of the people is being served, then it may make sense to
use trade policy to encourage a cleaner environment.

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