Natural Resource and Environmental economics are both fast developing fields of research. The first field of study was an offshoot of welfare economics and the examination of market failure, whereas the second one was largely underpinned by neoclassical growth economic theory. Several topics and problems tackled within these fields of study, such as climate change and pollution, occupy central roles in political discussions and feature frequently in the media.

Since its modest start in the 1960s, environmental economics has developed into one of the main branches of economics. A considerable part of this field of study is concerned with finding out how economies can avert inefficiencies in allocating and using natural and environmental resources.

The notion of market failure (when markets are unsuccessful at bringing about socially-optimal outcomes) features prominently within this subject area. The market fails frequently with respect to public goods, common property and externalities.

Market failure in the context of public goods occurs because they are non-rivalrous (in that one person’s consumption does not reduce another’s) and also because they are non-excludable (in that nobody can be excluded from utilising them once they are provided, even though levels of service for different individuals can vary). For these reasons, people have an incentive to free-ride on other people to pay for the public good. As the common saying had it, it pays to let Paul do it. But Paul has no incentive to do it either and in the process the public good does not materialise unless unless its provision is financed on a compulsory basis. Responses to mitigate climate change are classical cases of public goods.

When it comes to common property, the tragedy of the commons, first documented by Garrett Hardin in 1968, occurs as people do not take account of the scarcity of the collectively-owned resource and end up overharvesting it. As a result, the commonly-owned resource is degraded and at times, if carrying capacity is exceeded, collapses beyond restoration. Hardin argued that this happens because there are no restrictions on the use of the resource and no fee is paid for its exclusive use. In 1990, however, Nobel laureate Elinor Ostrom demonstrated that people enact self-governing rules when using actual common property resources in order to decrease the possibility of the tragedy of the commons.

An externality, a well-established concept dating back from Arthur C. Pigou’s work in the 1920s, is an effect experienced by another party for which there is no compensation or payment. Those who pollute a river may, for instance, cause damage to third parties (other people using the river) but may not be required to compensate them by the rights system in place. Since market systems do not price such external effects, there is an over-production of negative externalities and an under-production of positive externalities.

Environmental economics also looks into the idea of ecological restrictions to economic activity. David Ricardo had developed a distinct concept of scarcity resulting from the increasing marginal costs of extracting resources and using them. John Stuart Mill had examined the idea of a stationary state in which critical population stocks and capital were always constant. Moreover, Kenneth E. Boulding compared the Earth to a spaceship having a fixed energy supply which can only be replaced with solar energy, and a fixed supply of water and materials, which can provide a sustainable future by recycling them. Until the publication of Boulding’s  paper, externalities were deemed to be inconsequential. However, in Boulding’s  paper, externalities were affecting areas which were a long distance away from the initial emission source and were also accumulating through time. Additionally, Ronald H. Coase observed that an externality was conducive to two possible solutions:

  1. imposing the burden of action on the polluter, such as through a polluter tax in line with what has subsequently come to be known as the polluter-pays-principle; or
  2. having the victim paying the polluter not to pollute, subsequently referred to as a Coasean bargain.

In efficiency terms (though emphatically not in distribution terms), both solutions yield the same results.

Environmental valuation is another central topic in the environmental economics area. Some resources may be valued for their direct use whereas others may be valued for their intangible values such as existence and option values. Use values can, under certain circumstances, be inferred from revealed behaviour by, for example, using the travel cost method to value the area being visited, or by making use of hedonic techniques. Intangible values, on the other hand, can be assessed through methods such as contingent valuation, where preference is stated as opposed to being revealed.

Resource economics examines the economy’s use of natural resources and aims to develop techniques for managing them. While conventionally, this field of study emphasised the use of resources such as fisheries, forestry, and minerals, more recently, resources such as water, energy and the global climate have gained prominence.

The notion that all natural resources have an optimal usage rate has been determined by Lewis Gray and later on by Harold Hotelling. Oil price increases prompted concerns about how stable fossil fuel–dependent economic systems were.The optimal usage rate for a renewable resource was the theme of a separate branch of literature dating chiefly from Scott Gordon’s 1954 paper on fisheries. Gordon also explained why an open-access fishery could be used to the point where all economic rents were wasted. Hardin’s 1968 paper “The Tragedy of the Commons” essentially generalised similar issues.

The United Nations Environment Programme (UNEP) described the green economy as “one that results in improved human well-being and social equity, while significantly reducing environmental risks and ecological scarcities.” A green economy can be regarded as one which produces low carbon emissions, makes efficient use of resources and is socially inclusive. The Global Citizens Center describes the green economy as concerned with being environmentally sustainable, socially just and locally rooted.

The green economy integrates economic and environmental policies in a way that underlines the chances for new sources of economic growth while preventing unsustainable pressure on natural resources. This includes a combination of measures ranging from economic instruments such as taxes, subsidies and trading schemes, to regulatory policies such as standard-setting, to non-economic measures such as voluntary approaches and the provision of information.

The ‘blue economy’ was originally a project which aimed to find 100 of the top nature-inspired technologies that could influence world economies. The term is now considered a more recent version of the green economy concept, its name specifically seeking to emphasise support for sustainable development of the marine environment and oceans. The blue economy stands for a novel system of business design: using existing resources in flowing systems, where the waste of a product becomes the input to generate a new cash flow. A blue economy is a resilient one and offers an improved quality of life for everyone within the planet’s ecological limits. This description aligns the notion well with the green economy concept of Rio+20, mostly in how it re-emphasises the four fundamental components of sustainable development: the precautionary principle, intra-generational and inter-generational justice, the conservation of biological diversity and the integrity of ecological systems, as well as the internalisation of environmental costs.

Equinox Advisory provides policy- and project- related research and analysis services in the following areas:

  • Environmental Economics appraisals;
  • Economic valuation of natural resources by the utilisation of economic valuation techniques such as hedonic pricing and contingency valuation methods, and the interpretation of existing valuations using benefits transfer methods;
  • Incentive mechanism design for the construction of incentive-compatible market mechanisms for attaining resource efficiency or to bring about desirable environmental outcomes;
  • Bespoke Climate Change mitigation and adaptation strategies and roadmaps;
  • Development of management plans for protected areas;
  • Development of economic instruments for natural resource management; and
  • The provision of guidance and assistance in policy making through support tools such as cost benefit analysis, cost effectiveness analysis and multi-criteria analysis.

For more information about our Resource & Environmental Economics services, please contact us here.