Economics is all about making choices to satisfy the unlimited wants of the people with limited resources. While we limit our resources to land, labour, capital and entrepreneur, unknowingly, we also limit the application of Economics to production, consumption and market equilibrium only, thanks to the Indian Education System. But in this era of planetary emergencies, we need to realise that resources do not only include the tangible resources and that Economics is not only about production and consumption but also about ‘Conservation’ which lays down the roots of Environmental Economics.
Environmental Economics is basically a subset of Economics that guides us to balance our desire for prosperity and growth, while protecting the Natural Resources. It brings to light the interdependence of Environment and Economy while drawing analogies between Economics as we learn from books and
Economics as we can learn from the Environment.
What is interesting here to notice is that even the laws apply to every perception seen through the lens of environment. For instance, the Law of Diminishing Returns, in simple words, states that, if one factor of production is increased while the others remain constant, the marginal benefits will decline and, after a certain point, overall production will also decline. While the production initially will increase, it will eventually end up suffering diminishing
returns. However, as effectively applied by Garrett Hardin in 1968, this law can also be used to explain that why the ecological services have started diminishing.
Considering natural resources as limited and fixed (which they are, to an extent) and the ecological services as variable, the overuse of these services by us humans clearly justifies a downward sloping steep curve for the benefits that we accrue and an upward sloping steep curve for the level of negatives like pollution and externalities which worsens the situations by further accelerating all the environmental problems.
Economics teaches us to stay at the equilibrium, the point where the market
demand meets the market supply. But what if, at that particular point, the environmental cost incurred is so high that even the equilibrium price is too low to compensate? Or worse, what if, no amount of money can undo the damage that has been caused to the environment? This is exactly what we are doing to the environment right now. Any such equilibrium which destroys the environment defeats the whole purpose of it and paves way for the Market Failures.
When market fails to allocate the resources efficiently, it gives rise to market failures. One ultimate and the most evident example of this is Externalities. Externalities are basically, a consequence of an industrial or commercial activity which affects other parties (like the environment) without this being reflected in market prices.
A negative externality, like pollution, has its source from the kind of market failure as mentioned above, whereas a positive externality, like making a community park, is a benefit that remains unpaid but extends beyond the actual level of good or service produced in the economy. While economics states that both negative and positive externalities are examples of market failure, it is only the negative externalities that fail the environment.
The two broad methods, inter alia, of controlling negative externalities include
‘Cap and Trade’ and ‘Individual Transferable Quotas (ITQs)’. The former sets a bar for the maximum amount of emissions permitted to a particular group (of sources) spread over a given time period, which are then open to free trade, implying that the emissions can be bought or sold. The group having exceeded the number of emissions can buy it from the one who has not exhausted its amount of emissions. This ensures that the total emissions do not exceed the given bar, but also, maybe they won’t decline too which is again a problem. For instance, Fiat fulfils the compliance targets not by transitioning to clean vehicles and thereby reducing emissions, but by purchasing the Green credits from Tesla.
Individual transferable quotas are a market-based solution which, more or less,
works along the same lines. Used majorly to manage fisheries, it provides their owners with transferable rights to ‘catch a given portion of the Total Allowable Catch’ of a particular fish stock. The total allowable catch is divided into quotas which can be traded too. Howsoever, even if we apply this method and allocate quotas to the sources on annual basis keeping in mind the total emissions, it still would leave higher probability for the emissions to be regulated rather than reduced. Since these externalities are ‘externalized’ while calculating the cost of production, the consumers are not able to take into account the harm that they are doing to the environment which in turn justifies the need of immediate action towards climate change, beginning right from or homes.
Now is the time to begin ‘Ecosystem Valuation’. It is essentially assigning a value, monetary or otherwise, to the services provided by the Environment. For example, forest may provide its environmental services by giving shelter to the wildlife and boosting eco-tourism or by preventing desertification through increasing rainfall. With a loose reference to externalities, ecosystem valuation would necessitate ‘internalising’ them. But the problem here, is about quantifying the intangible benefits and harms and attaching a specific value to them.
But then again, it is not the only problem. It is merely a step towards solving a bigger problem. The most harmful problem and ironically, the easiest to solve, still haunts all over us, with people doing absolutely nothing regardless of them being aware about it, something no one would want to continue in the new decade too.