Oxford Bibliographies in Environmental Science : Environmental Economics

Environmental economics uses the tools of economic analysis to address issues relating to the impacts of human activity on the natural environment, the ways in which those impacts affect human wellbeing, and to consider appropriate policy and regulatory responses to environmental problems. Such policy response include targets (how much pollution should there be) and instruments (what means are available to achieve particular targets and what are their relative merits). Environmental economics emerged as a well-defined sub-discipline in the 1960s and in the first couple of decades most research considered local air and water pollution problems, with a key theme emerging that the use of economic incentive based policy instruments had large potential efficiency gains compared with traditional (command-and-control) regulatory instruments. As the subject became more actively researched, other strands have become interwoven into environmental economics. First, recognition that sustainability of activity matters at least as much as economic efficiency, and that these two objectives may not be always be mutually consistent. Second, system level thinking showed that one cannot properly address environmental concerns without being aware of the material basis of economic activity and without considering the ecosystems within which particular configurations of resources are found - hence the emergence of ecological economics, and the linkage of natural resource economics with mainstream environmental economics. Early work in environmental economics was national or sub-national in focus, and heavily dominated by papers that addressed issue of particular concern to the more affluent OECD countries. That changed for several reasons. Global poverty reduction became more central to the international agenda, and we became ware that dealing with poverty was a necessary condition for achieving sustainability goals. Globalisation and greater economic interdependence of nations pointed to the need to bring international trade into the analysis of environmental problems. And, perhaps of most importance in terms of its effect on work done by environmental economist, it became evident that many of the most serious and least tractable environmental problems were international, with impacts spilling over national boundaries and so requiring international policy co-ordination. In this vein, we see work dealing with acid rain pollution, ozone layer depleting substances (both of which have been dealt with relative successfully), and global environmental problems such as biodiversity loss and climate change (for both of which the track record is far less impressive). One unifying feature throughout the whole discipline of environmental economics is the issue of valuation of non-marketed goods and services, including environmental amenities. A central precept within the discipline is that environmental problems arise because of the presence of externalities, particularly public good externalities. By definition, externalities are not priced. However, designing appropriate policy responses required that shadow prices be imputed, and the huge literature on non-market valuation considers how these shadow prices can be estimated