Valuing Environmental Changes PDF
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INTRODUCTIONTOTHESERIES The aim of the Handbooks in Economics series is to produce Handbooks for various branches of economics, each of which is a definitive source, reference, and teaching supplement for use by professional researchers and advanced graduate students. Each Handbookprovidesself-containedsurveysofthecurrentstateofabranchofeconomics intheformofchapterspreparedbyleadingspecialistsonvariousaspectsofthisbranch ofeconomics.Thesesurveyssummarizenotonlyreceivedresultsbutalsonewerdevel- opments,fromrecentjournalarticlesanddiscussionpapers.Someoriginalmaterialis also included, but the main goal is to provide comprehensive and accessible surveys. TheHandbooksare intendedto providenotonlyuseful referencevolumesfor profes- sional collections but also possible supplementary readings for advanced courses for graduatestudentsineconomics. KENNETHJ.ARROWandMICHAELD.INTRILIGATOR PUBLISHER’SNOTE For a complete overview of the Handbooks in Economics Series, please refer to the listingattheendofthisvolume. v CONTENTSOFTHEHANDBOOK VOLUME1 ENVIRONMENTALDEGRADATIONANDINSTITUTIONALRESPONSES PerspectivesonEnvironmentalEconomics Chapter1 GeophysicalandGeochemicalAspectsofEnvironmentalDegradation BERTBOLIN Chapter2 EcosystemDynamics SIMONA.LEVINandSTEPHENW.PACALA Chapter3 PropertyRights,PublicGoodsandtheEnvironment DAVIDA.STARRETT Chapter4 EconomicsofCommonPropertyManagementRegimes JEAN-MARIEBALANDandJEAN-PHILIPPEPLATTEAU Chapter5 Population,Poverty,andtheNaturalEnvironment PARTHADASGUPTA Chapter6 TheTheoryofPollutionPolicy GLORIAE.HELFAND,PETERBERCKandTIMMAULL Chapter7 MechanismDesignfortheEnvironment SANDEEPBALIGAandERICMASKIN Chapter8 ThePoliticalEconomyofEnvironmentalPolicy WALLACEE.OATESandPAULR.PORTNEY vii viii ContentsoftheHandbook Chapter9 ExperiencewithMarket-BasedEnvironmentalPolicyInstruments ROBERTN.STAVINS Chapter10 ExperimentalEvaluationsofPolicyInstruments PETERBOHM Chapter11 TechnologicalChangeandtheEnvironment ADAMB.JAFFE,RICHARDG.NEWELLandROBERTN.STAVINS VOLUME2 VALUINGENVIRONMENTALCHANGES Chapter12 WelfareTheoryandValuation NANCYE.BOCKSTAELandA.MYRICKFREEMANIII Chapter13 Environment,Uncertainty,andOptionValues KARL-GÖRANMÄLERandANTHONYFISHER Chapter14 ValuingtheEnvironmentasaFactorofProduction KENNETHE.MCCONNELLandNANCYE.BOCKSTAEL Chapter15 RecreationDemandModels DANIELJ.PHANEUFandV.KERRYSMITH Chapter16 PropertyValueModels RAYMONDB.PALMQUIST Chapter17 ContingentValuation RICHARDT.CARSONandW.MICHAELHANEMANN Chapter18 CognitiveProcessesinStatedPreferenceMethods BARUCHFISCHHOFF ContentsoftheHandbook ix Chapter19 ExperimentalMethodsandValuation JASONF.SHOGREN Chapter20 QuantifyingandValuingEnvironmentalHealthRisks W.KIPVISCUSIandTEDGAYER VOLUME3 ECONOMYWIDEANDINTERNATIONALENVIRONMENTALISSUES Chapter21 IntertemporalWelfareEconomicsandtheEnvironment GEOFFREYHEAL Chapter22 NationalIncomeandtheEnvironment GEOFFREYHEALandBENGTKRISTRÖM Chapter23 EconomicGrowthandtheEnvironment ANASTASIOSXEPAPADEAS Chapter24 CGEModelingofEnvironmentalPolicyandResourceManagement LARSBERGMAN Chapter25 CalculatingtheCostsofEnvironmentalRegulation WILLIAMA.PIZERandRAYMONDKOPP Chapter26 EnvironmentalImplicationsofNon-environmentalPolicies ANILMARKANDYA Chapter27 InternationalTrade,ForeignInvestment,andtheEnvironment MICHAELRAUSCHER Chapter28 TheTheoryofInternationalEnvironmentalAgreements SCOTTBARRETT x ContentsoftheHandbook Chapter29 TheEconomicsofBiodiversity STEPHENPOLASKY,CHRISTOPHERCOSTELLOandANDREWSOLOW Chapter30 TheEconomicsofClimatePolicy CHARLESD.KOLSTADandMICHAELTOMAN DEDICATION AllenKneese Ifanyoneshouldbecalledthefoundingfatherofenvironmentaleconomics,itmustbe Allen Kneese. He was a pioneer as a researcher, and he was a pioneer as a research organizer.Heinspiredavastnumberofyoungerenvironmentaleconomists.Hisstudies ofwaterissuesinthe1960sinducedmany,includingoneoftheeditorsofthishandbook, tolookatenvironmentalproblemsthroughtheeyesofaneconomist.Hisenduringfight fortheuseofeconomicinstrumentsinenvironmentalpolicyhadimpactsevenoutside his own country. He was the first to recognize the need for economists to learn from otherdisciplines–physics,hydrology,ecology,politicalscience–inordertoenableus toproducegoodandrelevantpolicyrecommendations.AllenwasaneditoroftheNorth- Holland Handbook of Natural Resource and Energy Economics. He had promised to write an essay describing his personal perspective on the evolution of environmental economicsfor this handbook.Unfortunatelyfor allof us,he passedawayafter a long illness.Wededicatethesevolumestohismemory. xi PREFACETOTHEHANDBOOK Elsevierpublisheda3-volumeHandbookofNaturalResourceandEnergyEconomics in1985(thefirsttwovolumes)and1993(thethirdvolume).Whyisitnowpublishing a3-volumeHandbookofEnvironmentalEconomics?Isitnottruethateconomicdevel- opmentinEuropeandNorthAmericaduringthelastthirtyyearshasprovedthatthere isnoresourcescarcity?Afterall,pricesofmineralshavenotincreased(inrealterms), despitetheenormouseconomicexpansionthathasoccurredintheseregions.Moreover, airqualityhasimprovedsubstantiallyinEuropeandNorthAmerica.Arenotallenvi- ronmentalproblemssolved?Many“experts”arguethatthisisthecase,andiftheywere right,therewouldbenoneedforanewhandbook! However,herethereisaparadox.Ontheonehand,aggregatedataseemtoindicate thatwehaveovercomemostenvironmentalproblems.Ontheotherhand,ifwelookat amicrolevel,itiseasytofindcontraryevidence. Most environmental problems share the following two characteristics: they are in- tertemporal, and they are local. Soil erosion may cause severe economic losses in the future, but a long time might pass before the soil is so much eroded that its produc- tivityisaffected.Andwhenitsproductivityisaffected,theeconomicdamagewillfall primarilyonthenearbyvillageoffarmersandmightbebarelyfeltonanationalorinter- nationallevel.Thus,therewillbenosignofeconomicdamageuntillater,andbecause ofthelackofappropriateinformationandthelackofappropriatepropertyrights,there willbenoimmediateimpactsonagriculturalproductsandtheirprices. This parable about soil erosion possibly applies to most environmental problems, whichareofteninvisibleunlesswelookforthem.Human-inducedclimatechangeisa caseinpoint.Withoutknowledgeofthermodynamics,humanswouldnothavelaunched theresearchthatuncoveredempiricalevidenceofglobalwarming. Of course, there are examples of continued environmental deterioration at the ag- gregatelevel.Globalclimatechangeisperhapsthe mostdramaticone.Anotheristhe depletion of the world’s marine fisheries. But some problems, e.g., biodiversity, are mainly analysed and discussed from a global perspective when the real problem is arguably on a local level. Reduction of biodiversity implies a reduction in ecological resilience, which increases the risk that local human communities will lose essential ecosystemservices. Thesepointsarerelevantforbothrichandpoorcountries,butifwefocusourinterest onthepoorcountries,themagnitudeofwelfarelossesduetoenvironmentaldegradation isevengreater.Urbanpollution,soilerosion,reductionbothinthequalityandquantity ofpotablewater,etc.aretherule,nottheexception,inthesecountries. Economics, which is about the management of scarce resources, offers the tools needed for a rational analysis of environmental problems. The rapid development of xiii xiv PrefacetotheHandbook economic theory and methods as applied to the environment is the first reason a new handbook is needed. Several chapters in the earlier Elsevier handbook are outdated. Themostobviousexamplepertainstovaluationmethods,whicheconomistsusetomea- sureenvironmentalchangesinmonetaryterms.TheHandbookofNaturalResourceand Energy Economics had two chapters on valuation, one on theory and one on methods applicabletorecreationdemand.Incontrast,andasaconsequenceoftheexplosionof valuation research since the 1980s, the new handbook devotes an entire volume, Vol- ume2,“ValuingEnvironmentalChanges,”tovaluationtheoryandmethods.Valuation research has extended into areas, such as experimental economics, that were scarcely imaginedin1985. Anotherexampleismarket-basedinstrumentsforcontrollingpollution.Aninfluen- tialchapterbyPeterBohmandCliffordRussellintheearlierhandbookmadethecase for using economic principles to guide the design of pollution policies. Although ex- amplesofeconomicapproachesforcontrollingpollution,suchaseffluentchargesand emissionstradingprograms,existedinthe1980s,theyweresofewandsonewthatex- periencewiththemcouldbarelybeevaluated.Now,manycountrieshaveexperimented withpollutionchargesofvarioustypes,andatleastone(theUnitedStates)hascreated emissionstradingprogramsatthenationallevel.Economistshaveanalysedtheexperi- encewiththeseprograms,andthenewhandbookpresentsthelessonsoftheirresearch. Themoreimportantreasonforthenewhandbook,however,istheemergenceofen- tirelynewlinesofresearchthateitherdidnotexist10–20yearsagoorweresosparsely investigated as to preclude chapter-length reviews. Economic research on the envi- ronment today includes much more than studies that estimate the value of particular nonmarket environment goods or the cost-effectiveness of particular pollution control instruments. Someofthenewresearchisnewbecauseitappliesmicroeconomictheorymuchmore carefullytounderstandinstitutionalaspectsofenvironmentalmanagement(ormisman- agement). Volume 1 of this handbook, “Environmental Degradation and Institutional Responses,” presents much of the new research in this area, especially as it applies toenvironmentaldegradationatalocallevel.Itincludeschaptersoncommonproperty managementregimes;population,poverty,andtheenvironment;mechanismdesignand the environment; and experimental evaluations of environmental policy instruments – chaptersthathavenocounterpartsintheearlierhandbook. Other research is new because it examines environmental externalities and public goods at larger economic scales: an entire national economy, several countries in a givenregion,orallthecountriesoftheworld.Volume3,“EconomywideandInterna- tionalEnvironmentalIssues,”summarisesadvancesinthisarea.Newareasofresearch thatarecoveredinitincludeenvironmentalpolicyinasecond-besteconomy(the“dou- ble dividend” literature), empirical studies on economic growth and the environment (the “environmental Kuznets curve” literature), national income accounts and the en- vironment, international trade and the environment, and international environmental agreements. One chapter in the Volume 3 of the earlier handbook touched on envi- ronmental applications of computable general equilibrium models and the economics PrefacetotheHandbook xv ofclimatechange,butbothtopicsreceivemuchmoreextensivecoverageinVolume2 ofthishandbook. Due to the expansion of economic research on the environment, in one sense the scopeofthishandbookis,ironically,narrowerthanthatofitspredecessor.Thisdiffer- enceissignalledbythechangeintitle:theHandbookofEnvironmentalEconomics,not volumes4–6oftheHandbookofNaturalResourceandEnergyEconomics.Unlikethe earlierhandbook,thishandbookdoesnotincludechaptersonthesupplyofanddemand forenergyresources,minerals,timber,fish,andothercommercialnaturalresources. Instead, this handbook focuses on environmental goods and services that, due to property rights failures stemming from externalities and public goods, are not allo- catedefficientlybymarkets.Indeed,theseenvironmentalresourcesoftenlackmarkets altogether.Theyincludeairandwaterquality,hydrologicalfunctionsofforestsandwet- lands,soilstabilityandfertility,thegeneticdiversityofwildspecies,naturalareasused forrecreation,andnumerousothers.Theyareinprinciplerenewable,butinpractisethey are often subject to excessive degradation and depletion, sometimes to an irreversible degree. Commercial natural resources appear in this new handbook only in an incidental way.Forexample,thedevelopmentofcomprehensivemeasuresofnationalincomeand wealthrequiresconsiderationofallformsofcapital,includingallformsofnaturalcap- ital.So,thechapteronnationalaccountsandtheenvironmentdiscussesadjustmentsto conventional measures of national income and wealth for not only the degradation of environmentalqualitybutalsothedepletionofstocksofcommercialnaturalresources. Commercialextractionandutilisationofnaturalresourcesarealsosourcesofmanyof the environmental externalities discussed throughout the handbook. A prime example is damage from emissions of greenhouse gases, which are released primarily by the burningoffossilfuels. Forthesereasons,thishandbookisbestregardedasacomplementtotheHandbook ofNaturalResourceandEnergyEconomics,notareplacementforit.Thishandbookis intendedtobeanupdatedreferenceonenvironmentaleconomics,notnaturalresource economics. Thishandbookdoessharetwoimportantfeatureswiththeearlierone,whichwehave attempted to accentuate. First, both handbooks draw upon research conducted by not onlyeconomistsbutalsonaturalandsocialscientistsinotherdisciplines.Thechapters in this handbook on common property management regimes and population, poverty, andtheenvironmentdrawextensivelyontheanthropologicalliterature,whilethechap- teronpoliticaleconomyofenvironmentalpolicydrawsonstudiesbypoliticalscientists andlegalscholars.Somechaptersinthishandbookarewrittenbynoneconomists,from theearthsciences,ecology,andpsychology.Externalreviewersofchapterdraftswere drawnfromanevenbroaderrangeofdisciplines. Second, both handbooks emphasise dynamic considerations. Natural resource eco- nomics is inherently about efficient allocations over time, but many textbooks present environmental economics in an entirely static context: the valuation of current use of an environmental resource, or the short-run cost-effectiveness of market-based in- xvi PrefacetotheHandbook strumentscomparedtocommand-and-controlinstruments.Infact,environmentaleco- nomics,properlydone,mustconsiderseveraldynamicissues,whichthechaptersinthis handbookhighlight. Oneisthedynamicsofnaturalsystems.Thebuild-upofgreenhousegasesintheat- mosphere reminds us that pollution involves stocks as well as flows. The same is true for environmental resources other than air quality. Research by natural scientists has revealedthatthedynamicsofnaturalsystemscanbefarfromcontinuousandsmooth; theycanbenonlinear,complex,andchaotic,subjecttoabruptandirreversible(oreffec- tivelyirreversible)“flips”fromonestatetoanother.ThefirsttwochaptersinVolume1 highlightthedynamicsofnaturalsystems,whicheconomistsignoreattheriskofcon- structingeconomicmodelswithfeetofclay.Thesechapterscomplementtheexcellent chapterondynamicsofnaturalresourcesbyJamesWilenintheearlierhandbook. A second dynamic consideration follows immediately from the stock nature of en- vironmental resources: optimal management of environmental resources is no less in- tertemporalthantheoptimalmanagementofcommercialnaturalresources.Indeed,the timeframeforeconomicstudiesofclimatechangeismuchlonger–centuriesinstead ofdecades–thanthetimeframetypicallyconsideredinstudiesontheoptimalmanage- mentofmineralreservesortimberstocks.Hence,althoughthesamequestionsarise– whatwelfarefunctionshouldweuse?whatdiscountrate?–answeringthesequestions isharderandmoreconsequential.SeveralchaptersinVolume2addressthesedynamic welfareissues. Third,astaticperspectivecouldcauseenvironmentaleconomiststooverlookimpor- tant impacts of environmental regulations on technological change – and the impact ofenvironmentaldegradationonempiricalestimatesofratesoftechnologicalchange. Chapters in this handbook address these issues. In particular, a chapter in Volume 1 looksexclusivelyattheimpactsofenvironmentalregulationsontechnologicalchange. Thisissuewastreatedonlyinpassingintheearlierhandbook. Afinalimportantdynamicareaconcernsinstitutionalevolution.Likeotherfieldsof economics,environmentaleconomicshasbeenheavilyinfluencedbythe“NewInstitu- tionalEconomics.”SeveralchaptersinbothVolumes1and2ofthishandbookexamine theforcesthatshapeinstitutionalresponsestoenvironmentalchangeatlocal,national, andinternationalscales.Interactionswithfertilitydecisionsareespeciallyimportantat a local level, and so this handbook contains a chapter on population, poverty, and the environment. Havingnotedaboveawayinwhichthescopeofthishandbookisnarrowerthanthat of its predecessor, we conclude by noting a way that it is broader. The Handbook of EnvironmentalEconomicsplacesmoreemphasisontheapplicationofeconomicstoen- vironmentalpolicyissuesindevelopingcountries.Environmentaleconomicswasborn and raised in universities and research institutes in rich, industrialised countries with well-developedpolitical,legal,andmarketinstitutions.Mostpeopleintheworldlivein very different circumstances: poverty, restricted civil and political liberties, and tradi- tionalpropertyrightsthatarebackeduponlyweakly,ifatall,bythelegalsystem.By
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