ECON 391

Economics of the Environment

Chapter 2
Natural Capital, Linkages between the
Economy and the Environment, and Pollution

Stefania Strantza Winter 2019

Economics, Concordia University
Learning Objectives
1. Describe the three components of natural capital
2. Explain the intertemporal tradeoffs with natural
capital use
3. Describe ways to reduce residuals in the economy
4. Describe the different categories of pollution
5. Discuss about Canada’s air pollution

ENVIRONMENTAL ECONOMICS 2
What is Natural Capital?
• Natural capital is the stock of natural and
environmental resources that sustain our ecosystems,
economy, and well-being
̶ it sustains life and economic activity
• Three components comprise natural capital

ENVIRONMENTAL ECONOMICS 3
What is Natural Capital?
1. Natural resource capital - stocks of renewable and
nonrenewable resources
̶ minerals, energy stock, forests, water, fisheries
2. Ecosystems or environmental capital
̶ atmosphere, waste assimilation provide by forests,
grasslands, wetlands
3. Land

ENVIRONMENTAL ECONOMICS 4
What is Natural Capital?
• “Natural” to denote ecosystems and their component
parts
• “Capital” to represent that nature also is:
̶ a store of value: like other forms of capital (e.g., human
and physical), natural capital has huge value
̶ capable of producing goods and services over time:
natural capital provides inputs into everything we
consume
̶ depletable if there is not enough reinvestment in
sustaining the capital stock
ENVIRONMENTAL ECONOMICS 5
Impacts of Natural Capital Use
1. Using natural capital reduces the stocks available for
the future
̶ catching too many fish today may leave fewer to catch in
the future
2. Residuals are created by the use of natural capital
̶ processing fish or raising fish may create ocean pollution
3. Waste products may deteriorate natural capital stocks
̶ fish may not reproduce in a degraded environment

ENVIRONMENTAL ECONOMICS 6
Natural Resource Economics
• Natural resource economics studies how to efficiently
use natural resources over time
̶ when should a forest company cut the trees it owns?
(they can let them grow longer or cut them sooner)
̶ how many fish can be caught from an area without
threatening the overall species health?
̶ should a mining company dig up the ore from its mine
over a long time, or try to produce as much from its
mine as fast as possible?

ENVIRONMENTAL ECONOMICS 7
Renewable and Non-renewable Resources
• Resources are renewable and non-renewable
̶ the living resources, like fisheries and timber, are
renewable
̶ some non-living resources are also renewable (solar
energy, wind power and hydroelectric power)
̶ fossil fuels (coal, oil and natural gas) and non-energy
mineral deposits (gold and diamond) are non-renewable
resources
̶ living resources (fish and forests) can also become non-
renewable if harvests continually exceed their growth rate
ENVIRONMENTAL ECONOMICS 8
Natural Resource Issues
• One important feature of most natural resources is that
they are heavily “time dependent”
• Their use is spread out over time: rates of use in one
period affect the amounts available for use in later periods
̶ how much petroleum should be pumped from a deposit
this year, realizing that the more we pump now the less
there will be available in the future?
̶ what should today’s salmon harvesting rate be, knowing
that the size of the remaining stock will affect its availability
in later years?

ENVIRONMENTAL ECONOMICS 9
Circular Flow for the Environment and Economy

ENVIRONMENTAL ECONOMICS 10
Circular Flow for the Environment and Economy
• Environmental economics examines the residuals from
production and consumption and how to reduce or
mitigate their flow so they have less damage on the
natural environment
• Need to find ways to change the way economic activity is
done in order to reduce the damages to the environment
and protect the natural capital

ENVIRONMENTAL ECONOMICS 11
Reducing the Flow of Residuals into the Environment
• Circular flow shows “what goes in comes out”
• To reduce the amount of residuals, we have to reduce the
input of natural capital into the system
• There are 3 ways to do that:
1. Reduce the quantity of goods and services produced
2. Reduce the residuals from production
3. Increase recycling

ENVIRONMENTAL ECONOMICS 12
1. Reduce Pollution by Reducing Production of
Goods and Services
• This option is not very popular
• It implies that people have to live with less, or the total
population has to shrink
• While people often say they can live with less, they are
reluctant to give up income or material possessions
̶ would you be happy with a lower income?
̶ what possessions would you be happy to give up?

ENVIRONMENTAL ECONOMICS 13
2. Reducing Pollution by Reducing Residuals
from Production
• This option is more popular
• It involves pollution prevention, making the production
process less polluting
• It can also mean a shift to consumption of less polluting
goods and more environmentally friendly goods
̶ rechargeable batteries, reusable water bottles, house
cleaners with less chemical, solar phone chargers, shower
timer, and energy-efficient appliances and vehicles

ENVIRONMENTAL ECONOMICS 14
3. Increase Recycling
• This option is also popular
• If we reuse goods that were considered waste, we need
fewer natural resources in production, reducing overall
residuals
̶ recycling a cell phone means save energy, conserve natural
resources (metals, copper and plastics) and keep reusable
materials out of landfills
• However recycling has its limits
̶ not all goods can be recycled
̶ recycling can create residuals
ENVIRONMENTAL ECONOMICS 15
Types of Pollutants
• There are many different types of pollutants
• Their characteristics affect the policies aimed at
reducing the harm they cause

ENVIRONMENTAL ECONOMICS 16
Accumulative vs Non-accumulative
• Accumulative pollutants stay in the environment for
a long time. New emissions are added to existing
stocks of past emissions
̶ plastics, radioactive wastes, chemicals, GHG
• Non-accumulative pollutants are short-lived, they
disperse and assimilate quickly in the environment
̶ noise, unpleasant odor, dust
• Accumulative pollutants are harder to address as we
must consider past, present and future emissions

ENVIRONMENTAL ECONOMICS 17
Local vs Regional and Global Pollutants
• Local pollutants only affect one small area
• The pollution is usually produced in a specific area
and its impact does not travel to other areas
• Generally it is easier to identify and deal with them,
because both the polluter and those affected are in
one localized area
̶ noise, land degradation, ground level ozone (smog)

ENVIRONMENTAL ECONOMICS 18
Local vs Regional and Global Pollutants
• Regional and global pollutants can travel long
distances from their source
• They are typically longer lived pollutants that can
travel in the atmosphere or water
̶ regional: acid rain, smog
̶ global: GHG, ozone-depleting effects of
chlorofluorocarbon emissions (CFCs)
• Local environmental problems are easier to deal with
than regional or national problems, which in turn are
easier to manage than global problems
ENVIRONMENTAL ECONOMICS 19
Point Source vs Non-point Source
• Point source pollutants come from one or a few
specific sources. It is possible to identify the source
of the pollution
̶ power plant emissions, pollutants from a major
industrial facility

ENVIRONMENTAL ECONOMICS 20
Point Source vs Non-point Source
• Non-point source pollutants do not have a clearly
identified source, or the sources are numerous so it
is hard to tell which exact emitter produced the
pollution
̶ GHG, storm water run off from roadways, agricultural
chemicals run off the land
• Point source pollutants are easier to address as it is
possible to identify and monitor the source of the
pollution

ENVIRONMENTAL ECONOMICS 21
Continuous vs Episodic Pollutants
• Continuous pollutants involve a steady production of
pollution
̶ emissions from power plants, cars, and households
occur on a roughly continuous basis
• Some continuous pollutants are easier to address,
they can be more easily measured and monitored,
and pollution control technology can be installed
̶ car emissions, power plant emissions, wastewater
emissions

ENVIRONMENTAL ECONOMICS 22
Continuous vs Episodic Pollutants
• Episodic pollutants only happen occasionally (they
may happen rarely)
• The issue is to reduce the risk that an episode of
pollution will occur
• It may be hard to estimate the likelihood of a
catastrophic event, or to have the right supplies to
deal with a situation that has not occurred before or
only happens occasionally
̶ oil tanker spill, oil well blowout, pipeline rupture,
chemical spill
ENVIRONMENTAL ECONOMICS 23
Environmental Damages not Related to Emissions
• We have focused on the characteristics of different
types of environmental pollutants that are related to
the discharge of residuals
• But there are many important cases of deteriorating
environmental quality that are not related to
residuals discharges
̶ the conversion of land to housing and commercial
areas destroys the environmental value of that land

ENVIRONMENTAL ECONOMICS 24
Environmental Damages not Related to Emissions
• Our job is still to understand the incentives that create
these impacts, and to change these incentives when
appropriate
• Although there are no physical emissions to monitor
and control, there are outcomes that can be described,
evaluated, and managed with appropriate policies

ENVIRONMENTAL ECONOMICS 25
Emissions Test
• Describe whether the following pollutants are:
̶ accumulative or non-accumulative
̶ local or regional/global
̶ point source or non-point source
̶ continuous or episodic
1. Automobile GHG emissions?
2. Emissions from a power plant?
3. A loud party next door?

ENVIRONMENTAL ECONOMICS 26
 GHG Emissions per unit GDP for years:
1990, 2000, 2012

Canada’s Air Pollution

• Canada is a major producer
of GHG and air contaminants
because of the fossil fuel
intensity of our economy
• Alberta, Saskatchewan and
until recently Ontario
generate much of their
electricity by burning coal
Source: PBL Netherlands Environmental Agency, Trends in Global CO2
Emissions: 2013 Report, The Hague (2013)

ENVIRONMENTAL ECONOMICS 27
 Canada’s Air Pollution
GHG Emissions for the world and top 10 emitting countries and regions, 2005 and 2013

Source: Environment and Climate Change Canada (2017) Canadian Environmental Sustainability Indicators: Global greenhouse gas emissions
https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/global-greenhouse-gas-emissions.html

• Between 2005 and 2013, global GHG emissions increased by 18.3%

• Canada's emissions in 2013 made up 1.6% of global GHG emissions
ENVIRONMENTAL ECONOMICS 28
 Canada’s Air Pollution
GHG Emissions, Canada, 1990 to 2016

Source: Environment and Climate Change Canada (2018) National Inventory Report 1990–2016
https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas-emissions.html

• The recent decrease in emissions was primarily driven by

reduced emissions from the electricity generation sector

ENVIRONMENTAL ECONOMICS 29
 Canada’s Air Pollution
GHG emissions by province and territory, Canada, 1990, 2005 and 2016

Source: Environment and Climate Change Canada (2018) National Inventory Report 1990–2016
https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas-emissions.html

• In 2016, the top 5 emitters (Alberta, Ontario, Quebec, Saskatchewan

and British Columbia) together released 90% of Canada's national
total GHG emissions
ENVIRONMENTAL ECONOMICS 30
Webpages with Information
• https://data.worldbank.org/
• https://www.canada.ca/en/environment-climate-
change.html
• http://www.oecd.org/
• https://www.epa.gov/
̶ https://www.epa.gov/ghgemissions/global-
greenhouse-gas-emissions-data
• https://www.wri.org/

ENVIRONMENTAL ECONOMICS 31
Overview
• How a country can sustain its economy and society
• We introduced:
̶ the concept of natural capital
̶ examples of renewable and non-renewable resource
̶ a circular flow relationship for the environment and the
economy, and three mechanisms for reducing residuals
in the economy
̶ several types of pollution
• Short discussion about Canada’s air pollution
ENVIRONMENTAL ECONOMICS 32