The Economics of the Environment

Of late, hues and cries are being heard in relation to the Environment. A crisis is impending. The Environment plays an important role in every economy. The recent HDR 2006 stresses on ‘Climate Crisis’.

Developments, a magazine produced by the Department for International Development (DFID) brings out some alarming statistics to show how ‘climate change’ threatens the world’s poor.

1) 97% of all deaths from natural disasters are in poor countries.
2) Longer rainy seasons have already led to increased malaria in parts of Rwanda and Tanzania.
3) Over 3 billion people in the Middle East and the Indian sub-continent could be facing acute shortages of water-affecting productivity and jobs.
4) Climate change brings the risk of increases in serious diseases such as malaria, dengue, yellow fever and polio.
5) A temperature rise of 2-3.5 degree Celsius would reduce farmers’ incomes by between 9 and 25%.
6) The area of the world stricken by drought has doubled between 1970 and the early 2000s.
7) There are over a billion people living without access to clean, safe water and 2.6 billion people have nowhere to go to the toilet.

These numbers prove that the ecosystem has been seriously affected by various kinds of pollution. This also warrants the need for generating energy using environmental-friendly methods.

India and the Environment

Studies conducted by WWF, available exclusively with CNN-IBN reveal that the Gangotri glacier is receding at an alarming average rate of 23 meters every year. [Iyer 2006] Glaciers are considered to be indicators of Global Warming.

Orissa enjoys unrivalled natural resources and have proved attractive to industrial giants. It has the highest overall poverty ratio in the country, with 48% living below the poverty line; its level of infectious diseases and malnutrition is alarming; it is particularly prone to natural disasters, such as cyclones and floods, says Prodeepta Das in his article ‘Counting the cost’ in Developments.

India on Tuesday became part of a seven-member international consortium to launch a multi-billion dollar experimental fusion reactor called ITER. The aim of the research reactor is to create fusion technologies that could emulate the power of the sun, that is, to develop a source of limitless, clean energy. [Naravane 2006]

It is of utmost importance that India strives to undertake research in resource economics so as to develop processes which will prove to be environment friendly. Jonathon Porritt, in his article in Developments titled ‘Capitalism for the poor” posits that ‘The end of cheap oil means the end of easy economic growth.’ Thus it is important that nations start finding alternative avenues to harness energy.

Green Tax: The state of Andhra Pradesh is introducing ‘green tax’ from 27th of November. This will be levied on vehicles which have been in use for 15 years and above. The revenue from this would be used for pollution control activities. This is a very beneficial tax which needs to be introduced in the whole of India.

Environmental protection efforts

The 1997 Kyoto Protocol expects it’s signatories to limit or reduce their greenhouse gas emissions. This protocol is yet to be ratified by many of the ‘major polluting’ nations.

The film ‘An Inconvenient Truth‘ directed by Davis Guggenheim and featuring Al Gore portrays the effects of global warming and its related hazards.

Many multinational and transnational companies are involved in such environmental protection. The effects of such activities are yet to be seen.

Concepts in Environmental Economics

Environmental economics is concerned with the impact of the economy on the environment, the significance of the environment to the economy, and the appropriate way of regulating economic activity so that balance is achieved among environmental, economic and other social goals. [Kolstad 1999]

Pigovian tax:
Early in the twentieth century the English economist Arthur C. Pigou argued for the imposition of taxes on generators of pollution. Since the social cost of pollution is in excess of the private cost to the polluter, the government should intervene with a tax, making pollution more costly to the polluter. If the pollution is more costly to produce, the polluter will produce less pollution. This tax has come to be called a Pigovian fee or Pigovian tax. [Ibid]

Other concepts like Coase theorem (Ronald H. Coase, Nobel winner of 1991), Ratchet effect are also present. The ratchet effect occurs when the regulator has incomplete knowledge of the firms’ costs and the two must repeatedly interact. [Ibid]


Thus it is indeed in the interest of everyone to protect the environment. Planting trees, abstaining from burning plastic, reducing travel by vehicles whenever possible are some of the things we could do to reduce pollution. Environmental hazards have a significant impact on the economy and in particular those of the poor countries. Though most of the pollution is done by the advanced countries, it is the ‘other countries’ which mostly bear the brunt.

Resources on Environmental economics

1) Environmental Economics (Blog)
2) Association of Environmental and Resource Economists (AERE)
3) Economist’s view (Blog)

Further Links

1) Creative Taxing Can Save the Environment

2) STERN REVIEW: The Economics of Climate Change