| Chapter 9: Environmental Economics |
You can't have a healthy economy without a healthy environment. We need not choose between breathing clean air and bringing home secure paychecks. The fact is, our environmental problems result not from robust growth, but from reckless growth. The fact is that only a prosperous society can have the confidence and the means to protect its environment. And the fact is healthy communities and environmentally sound products and services do best in today's economic competition.
President Bill Clinton
In 1993 the nexus between the economy and the environment was never more clear. Continued economic growth is based on the availability of material and energy resources and an environment that is clean and healthy. Protecting the natural environment requires a nation to be flexible, to make tradeoffs-a fundamental tenant of economics-and to recognize the benefits and costs of the choices made.
Markets are shaped by consumer's choices of goods and services and producer's choices of inputs. Although the market price of a product indicates its worth to consumers, the price of use of natural resources does not always have a monetary value that can be as easily quantified. Because the nation values the benefits provided by the environment, and is now acknowledging the costs associated with loss of environmental amenities, the federal government and the American people as a whole have taken action to protect the environment and continue on this path.
Conditions and Trends
In addition to environmental cost accounting, major trends in 1993 included a growing interest in sustainable development and in using an ecosystem approach to management as a way to achieve it.
Reinventing Environmental Management: Cost Accounting
In September 1993 the National Performance Review issued an accompanying report entitled, Reinventing Environmental Management, that calls for improved federal decisionmaking through environmental cost accounting. The NPR recommended the following actions:
The EPA, DOD, and OMB should develop pilot programs to demonstrate the use of environmental cost accounting by the federal government. The report calls for the EPA and the DOD Office of the Deputy Under Secretary for Environmental Security, in consultation with the OMB, to convene an interagency working group with the following responsibilities:
. Develop demonstration projects to test the applicability and effectiveness of environmental cost accounting in the federal government; and
. Formulate accounting guidelines for the demonstration projects.
The Environmental Cost Accounting Working Group should report on the demonstration projects and make recommendations on the use of environmental cost accounting in the federal government. The NPR calls for the interagency working group to report results of the projects and recommendations on the extent to which environmental cost accounting could be implemented throughout the federal government.
The President should issue a directive to implement environmental cost accounting in the federal government. Based on the recommended guidelines from the interagency working group, the President should issue a directive to agencies to incorporate environmental cost accounting into the appropriate decisionmaking processes.
Sustainable development offers an opportunity to gauge the relationship between economic development and environmental protection. The 1987 report of the World Commission on Environment and Development (the Brundtland Commission) defines sustainable development as that which -meets the needs of the present generation without compromising the ability of future generations to meet their own needs.- Sustainable development ensures that future generations have access to the -social capital---human, natural, and physical capital-to create a life at least equal to that of this generation. Similarly, the National Environmental Policy Act declares that it is the continuing policy of the Federal Government to create and maintain conditions under which man and nature can exist in productive harmony and fulfil the social economic and other requirements of present and future generations.
Economic growth is a driving force for improved welfare and environmental quality. An improvement in either the environment or the economy need not be at the expense of the other. Since the aim of sustainable development is to achieve an equilibrium between economic and environmental resources to enable future generations to enjoy a standard of living at least equivalent to ours, improved methods for calculating the value of environmental resources are required. To meet the challenge of sustainable development, the federal government continued in 1993 to seek ways to integrate environmental, economic, and social policies to reduce the cost, reduce the conflict, and reap the benefits of environmental protection.
President's Council On Sustainable Development
Established by Executive Order 12852 on June 29, 1993, the President's Council On Sustainable Development is a 25-member partnership of high-ranking representatives from industry, government, environmental, labor and civil rights organizations. The partnership is charged with developing bold new approaches to integrate economic and environmental policies. By charter the Council shall have the following duties:
. Advise the President on matters involving sustainable development. In furtherance of the mission, the Council will develop and recommend to the President a national sustainable development action strategy to foster economic vitality.
. Advise the President on fashioning an annual Presidential Award
recognizing exemplary efforts in advancing sustainable development ideals; submit nominations for the award to the President.
. Advise the President on conducting a public awareness and participation campaign on appropriate uses of the nation's natural and cultural resources.
Expenditures and Revenues
The EPA estimates that U.S. public and private sector costs for 1993 pollution abatement and control were $123.7 billion. The estimated distribution of costs among economic sectors in 1993 revealed that private industry had the greatest total share (62 percent), followed by local governments (22 percent), the federal government (13 percent) and state government (3 percent). Of total U.S. expenditures, $67 billion (54 percent) were associated with operating, maintenance, and administrative expenses, and the remaining $57 billion (46 percent) reflected the annual depreciation of the stock of pollution control capital equipment.
Flow of Materials
The potential value of recycling materials that today are discarded as wastes has implications for the environment and the economy. Wastes are a byproduct of delivery and consumption of four basic commodities that support modern society: food, water, energy, and materials a catch-all term for everything else. The nation uses renewable and nonrenewable resources to manufacture materials. Forestry and agricultural products, for example, provide renewable materials, and minerals and fossil fuels provide nonrenewable materials. The use of these materials to manufacture the goods that have become an essential part of modern society-machines, housing, roads, cars, packaging, and other consumer products has increased over the years.
Material input to the U.S. economy in 1990 provides a snapshot of current material use patterns on a weight basis and their implications for environmental risk. Trends in material usage reflect historical consumption and recycling patterns. Of the 2.5 billion metric tons of materials consumed by the nation, only 10 percent were recycled. Without changes in technology, the quantity of residuals or waste produced increases directly in relation to material use. Three critical issues relate to this equation:
. Potential resource scarcity;
. The limited capacity of the environment to absorb residuals; and
. Environmental hazards associated with toxic residuals.
Of the 487 million metric tons of residuals released to the environment, excluding associated water or nonmineralized waste, 57 percent was post-consumer waste, 28 percent was waste from dissipated uses with limited potential for recovery, and 15 percent was processing waste.
As material flows increase, the waste products from extraction, processing, use, and ultimate disposal of materials also increase. A combination of change in industry practice, economic incentives, new technology development, shift in material use, and change in consumer behavior will change the growing residuals-producing trend. If not, current environmental problems will worsen unless the ability of the environment to absorb waste is increased with better and more costly methods of solid waste disposal.
Construction Materials. Construction minerals such as stone and gravel represented the nation's largest material use, with 1.8 billion metric tons or 70 percent of total U.S. apparent consumption. Of these minerals 7.8 percent were recycled. Of the total residual waste, 235 million metric tons or 48 percent were from construction materials released into the environment. These materials are essentially extracted and used without any change in their chemical composition and are associated with visibility, noise, and dust. Most of the residuals are post-consumer waste (135 million tons or 58 percent); processing creates 63 million metric tons; and dissipative use creates 37 million metric tons of residuals.
Industrial Minerals. Consumption of industrial minerals, such as those used to produce fertilizer and road salt, totaled 330 million metric tons, with 7.6 percent from recycled materials. Release of industrial mineral residuals totaled 129 million metric tons. Although these materials undergo processing that can alter physical and chemical properties and concentrations, they create a relatively small amount of processing waste (5 million metric tons). Most of the waste is related to dissipative uses (98 million metric tons), followed by post-consumer releases (26 million metric tons). Some commodities in this group are harmful to the environment such as cadmium, asbestos, fertilizers, and road salt.
Metals. Consumption of metals amounted to 112 million metric tons, but 54 percent were recycled materials. Residuals released to the environment by metal extraction and processing totaled 20 million metric tons. For several commodities in this group, releases associated with the processing and manufacturing phase and, to a lesser extent, post-consumer waste are cause for concern. Although not included in the residuals total, extraction waste near mining locations can cause environmental problems.
Plastics. The use of organic feedstocks to create plastic is growing rapidly and has created concern about the increasing volume of material in municipal landfills. Furthermore, plastics contain additives, such as colorants, stabilizers, and plasticizers, that may contain toxic constituents such as cadmium and lead; plastics contribute 28 percent of all cadmium found in municipal waste and approximately 2 percent of all lead. Plastics that contain heavy metal-based additives may contribute to the metal content of incinerator ash. Some feedstock producers are establishing collection networks and secondary markets that could improve recycling rates. Because only 2 percent of plastics are recycled, virtually all of these materials are landfilled or incinerated.
Renewable Organics. The total for renewable organic material consumption was 231 million metric tons, including wood products such as lumber and paper and nonfood agricultural products such as tobacco, vegetable oils, and cotton. Of these 8 percent were recycled materials. Residuals of renewable organics amounted to 80 million metric tons. Dissipative use represented 1.2 percent of the total, while post-consumer waste represented 99 percent. Renewable organics create environmental problems with the large quantity of paper in the post-consumer wastestream and the process wastes, including chemical releases, associated with papermaking. Other than wood pulp and tobacco, renewable organics do not create significant environmental problems.
Nonrenewable Organics. Consumption of nonrenewable organic materials derived from petroleum and natural gas, such as plastics, synthetic rubber, asphalt, and manmade textiles, totaled 113 million metric tons, with only 2.7 percent produced from recycled materials. Residuals from post-consumer waste totaled 21 million metric tons. Extraction wastes are generally low, but processing and manufacturing wastes can create local environmental problems. Data on the amount of releases during these stages are incomplete.
Animal Products. Consumption of nonfood animal products, such as leather and furs, was the lowest of all groups at 2 million metric tons, of which only 1 percent were recycled. Residuals nearly equaled the quantity of apparent consumption (2 million metric tons), with most residuals associated with dissipative uses. Processing waste discharged was 20,000 metric tons, and post-consumer waste, another 50,000 metric tons. These materials are renewable and normally biodegradable.
International Trade and the Environment
Among the growing number and scope of international activities concerned with environmental protection policies, a subject of increasing attention is the relationship of environmental policies and practice to international trade.
Federal Policymaking. In the United States, a number of federal departments and agencies, including the Office of the U.S. Trade Representative (USTR), State Department, Environmental Protection Agency, and the departments of Commerce, Treasury, Agriculture, Labor, Interior, Energy, and Health and Human Services, participate in trade environmental policymaking. Together these federal agencies are seeking to develop information to better understand the linkages between trade and the environment and to make trade and environmental policies compatible with sustainable development.
International Dialogues. The United States is actively participating in a number of international dialogues regarding trade and the environment, including the new World Trade Organization, Committee on Trade and the Environment; the Organization for Economic Cooperation and Development (OECD), Trade and Environment Joint Experts Committee; and the United Nations Environment Program/United Nations Commission on Trade and Development (UNEP/UNCTAD) joint work program on trade and environment.
Trade in Environmental Protection Equipment. A 1993 EPA report entitled International Trade in Environmental Protection Equipment: An Assessment of Existing Data, estimates total U.S. imports, exports, and trade balances for environmental protection equipment between 1980 and 1992. Estimates include trade levels in environmental protection equipment for air, water, and other environmental media. The EPA also examined bilateral trade flows between the United States and selected U.S. trading partners. The report found that the United States is a major exporter of environmental protection equipment, in general, and of air pollution control equipment in particular. Only 21 percent of the air pollution control equipment sold in the United States is supplied by imports. The United States enjoyed a surplus of trade in environmental equipment for all purposes of $1.1 billion in 1991, and this surplus has been increasing since 1989. Between 1989 and 1991, U.S. exports increased approximately 70 percent, while imports increased 45 percent. The nation has been operating positive trade balances with most of its major trading partners in environmental protection equipment since 1989. The largest surpluses in 1991 were held with Canada and Japan.
U.S. exports, imports, and trade balance for environmental
protection equipment, 1989-1991.
(thousands of current dollars)
Exports Imports Trade Balance
Country 1989 1990 1991 1989 1990 1991 1989 1990 1991
Canada 126, 945 383,331 420,399 94,3 91 117, 410 102,901 32,554 265,921 317,498
France 43,482 57,261 71,104 19,6 92 19,781 24,2 53 23,79 0 37,480 46,851
Germany 33,6 74 40,588 97,161 52,524 61,910 88,0 57 (18,8 50) (21,3 22) 9,104
Japan 142, 239 138,13 3 319,78 9 71,5 56 92,1 40 118, 102 70,68 3 45,993 201,687
Mexico 53,5 12 69,699 94,720 11,2 68 16,6 34 18,5 61 42,24 4 53,065 76,159
of Korea 50,182 49,152 57,959 1,58 9 3,073 4,680 48,57 3 46,079 53,279
of China 66,586 59,707 72,427 13,8 48 21,943 18,8 63 52,73 8 37,764 45,726
Kingdom 74,291 38,227 98,282 28,565 63,320 45,5 32 45,726 (25,093) 52,750
Total1 975,158 1,310,254 1,680,021 409,667 501,391 566,921 565,491 808,863 1,113,100
Source: U.S. Environmental Protection Agency, International Trade in Environmental Protection Equipment: An Assessment of Existing Data, EPA 230-R-93-006, (Washington, DC: EPA, July 1993), Table 6, page 29 and Table 8, page 25.
In 1993 the federal government made progress in establishing methods of environmental accounting and valuation to characterize the benefits provided by the environment. A major component has been the recognition in recent years of the value of ecosystems.
Environmental Accounting and Valuation
In 1993 the EPA continued to support the work of the Ecological Economic Forum, a group of ecologists, economists, and other social scientists that began meeting in 1991 to advance the state of the art of ecosystem valuation methods. The deliberations of this forum led to recommendations for integrated research as a means to improve linkages between ecological and economic methods and to develop improved protocols for valuation studies.
The EPA has initiated a case study of the Patuxent River watershed in Maryland, intended to contribute to the general development of integrated ecological-economic modeling. The research will develop methods for valuing ecosystem configurations and services from them. The effort seeks to model the interaction of the ecosystem and human activity, illustrating how humans intervene in the ecosystem and how different ecosystem configurations contribute to human welfare.
In 1993 the Bureau of Economic Analysis prepared modified gross domestic product (GDP) national income and product accounts for publication in 1994. Prepared with support from the National Biological Survey in the Department of the Interior, these accounts reflect the depletion of selected natural resources and also the -discovery- of natural resources as a result of exploration. The national income and product accounts, designed to help government agencies interpret the processes that produce current income and future wealth, have been used as a tool for policy analysis for the last 50 years. In this regard incorporating elements of the environment into the national accounting framework will improve the quality of the accounts and the policy options available.
The EPA is exploring methods to introduce environmental considerations into conventional economic accounting systems. A pilot study of environmental accounting in the Chesapeake Bay region was conducted by the EPA and reviewed by the Science Advisory Board's Environmental Economics Advisory Committee (EEAC). Based on the EEAC review of the study, the EPA published a report evaluating the potential of environmental accounting to capture environmental concerns, as well as the difficulties in such an exercise in 1993. EPA environmental accounting work will focus on the approach proposed in the draft handbook on Integrated Environmental and Economic Accounting prepared by the United Nations Statistical Office. In particular the EPA is investigating the feasibility of expanding an ongoing economic input-output (I-O) study of environmental protection activities to include environmental measures such as air and water discharges. The I-O study follows protocols defined by the Department of Commerce and is used to measure who buys and sells goods and services from whom within defined industrial and governmental sectors found throughout the economy. The introduction of air and water discharges would make more explicit the non-priced economic service the environment provides as a result of its ability to assimilate pollutant discharges allowed under existing air and water permits. IF this approach is deemed feasible and reasonable, the EPA will develop set of environmental accounts using this framework.
Harnessing Market Forces
The nation has achieved considerable progress in protecting natural resources and the environment as the result of establishing environmental standards and regulations. Prior to passage of U.S. environmental laws, the absence of ownership of these public goods contributed to the decline in environmental quality. The development of standards succeeded in making more explicit the costs to the environment of human activity.
Much of the early environmental legislation and policies focused on developing standards and dictating engineering solutions to rectify the most obvious environmental hazards. Many of these environmental improvements led consumers and producers to invest in environmental pollution controls. The early emphasis on command-and-control solutions to environmental problems, while in many ways successful in achieving environmental goals, has proved to be expensive. Furthermore, many environmental problems do not easily lend themselves to these same control measures. The complexity of controlling large numbers of dispersed pollution sources demands that alternative policies and economic tools be used to resolve these issues.
The federal government has moved to adopt more market-based incentives and other economic tools to help reduce the costs associated with environmental requirements. For example, using a market-based approach, the government specifies an environmental goal, such as a 50-percent reduction in emissions of a given compound within a geographic area, and then provides flexibility to the industry in choosing how to meet that goal in the most cost-effective manner.
As a result of these efforts, market-based incentives have moved from relative obscurity to a tool for improving the environment while departing from -command and control- regulations and sometimes offering opportunities to reduce cost. The 1990 Clean Air Act amendments has led the EPA to propose and promulgate incentive-based mechanisms for the control of acid rain, for the development of cleaner burning gasoline and less polluting vehicles, for states to use in controlling urban ozone and carbon monoxide, and to facilitate the reduction of toxic air emissions.
As other key environmental statutes-are up for reauthorization, incentive mechanisms promise to be actively considered as environmental legislative proposals make their way through Congress. The EPA is preparing analysis of numerous possible incentives to support this dialogue. Some states have implemented incentive programs, and others are considering such proposals.
The evidence on the environmental effects of economic incentives, while much less extensive than that on economic efficiency, suggests that incentive mechanisms are fully compatible with environmental objectives (see the incentives table, which describes different types of incentive instruments, some of which are further distinguished on the basis of when the incentive becomes effective). Incentives can establish a system of rewards for innovation through a variety of specific mechanisms. Some incentive mechanisms establish prices indirectly through market transactions. Within this group are information reporting requirements, such as Title III of the Superfund Amendments and Reauthorization Act. Others, such as pollution fees and various trading systems, including the EPA air emission trading program, transferrable development rights, and marketable effluent discharge credits, are other types of incentives.
Some new systems as yet not fully implemented hold out considerable promise for being both effective and efficient in reducing pollution. Beverage container deposits appear to have greatly reduced litter, but limited knowledge is available on the impact of other deposit-refund systems and virtually no analysis of the costs and benefits of any of the deposit-refund mechanisms is available.
As in the United States, official interest in economic incentives appears to be increasing in Europe. A review of the use of economic incentives outside the United States suggests a preference for a somewhat different mix of incentive mechanisms. The United States uses many more marketable permit systems than do European countries, but much less environmental labeling. Although charges and fees are used more widely in Europe, they tend to be revenue-raising instruments with few incentive impacts, just as in the United States. The lack of incentive impact of charges is due primarily to their low magnitude and because a number of the charges are not closely linked to waste generation or product consumption.
In 1993 the Administration's National Performance Review identified the use of market systems as a tool to further investigate for achieving environmental standards in a cost-effective manner. Among the set of market-based tools, trading systems have drawn the greatest overall attention of environmental managers.
Although all trading programs require some involvement of a pollution control agency, the extent of that involvement varies substantially. The nature of the pollutants being controlled and the production practices of the firms being regulated serve to steer which types of trading are feasible. Besides these factors a number of general conditions can be used to differentiate among trading programs (see attributes table).
For example, trading programs can occur among different firms or different parts of an individual firm's production operations-both of which could take into account matters of quantity and timing of emissions. Trading among firms is often used to take advantage of relative cost efficiencies that may arise as a consequence of new, cleaner technologies not uniformly adopted by firms, such as an acid rain trading program. Trading within a firm's production process allows the firm to target those steps in the production process that can be modified to reduce emissions, or similarly, to select cost-effective solutions involving a number of processes in those cases where multiple outputs are produced, such as the steel industry effluent bubble.
Another factor in operating a trading program involves whether mass emissions limits are required. Mass emission limits prescribe the total emissions that a polluter may emit over a designated period of time. Issues concerning such limits include setting a baseline, the nature of the pollutant such as bioaccumulative and transport properties, accurate emissions monitoring, and defining penalties provisions that are limit-related. The geographic area for which trades are permitted is largely determined by the type of pollutant. If the pollutant spreads widely and has adverse effects at the low concentrations found at distant points, the geographic area is likely to be large, such as chlorofluorocarbons. Other pollutants such as wood stove emissions may have adverse effects primarily on a small local or regional area.
Most published studies on the subject have been based upon exante analysis of costs and anticipated market behavior. Because of the potential impacts nationwide of acid rain and climate change, the EPA is committed to assessing the cost savings of trading programs. The objective is to provide further empirical evidence of the efficacy of trading as a means of reducing the cost of environmental protection.
Environmental Concerns and Innercity Economics
The EPA is forging partnerships with other federal agencies and departments to provide innercity residents and minority businesses with opportunities connected to eliminating environmental hazards in their communities. Partnerships assist in carrying out the federal commitment to use programs and activities to advance environmental protection in urban communities. These programs also create minority business entrepreneurial opportunities, job training, and placement by stimulating economic growth and development in the community. Innercity problems such as substandard water and air quality, toxics in the home (lead, asbestos, and indoor air pollution), and energy conservation are of paramount concern at the community, municipal, state, and federal levels.
The EPA Office of Environmental Equity (OEE) is sponsoring Community Economic Development Projects such as the following:
Mercado Project. An OEE training grant funds the California State University at Hayward to prepare a business management training program and business plan for its Mercado Project in the Asian-American community in the San Francisco Bay area. The project is developing a public education center and small business incubator for retail outlets and related manufacturing, such as assembly facilities of high-value-added products made using secondary materials as a feedstock. The project will train and employ diverse members of the community who would be less likely to have these entrepreneurial and job opportunities without such training and business development. Unemployed residents will learn to convert recyclable woods and plastics into furniture that can be sold to provide revenue for the community.
District of Columbia Lead Abatement. A memorandum of agreement among the EPA, departments of Housing and Urban Development and Commerce, and the District of Columbia has led to a project that trains unemployed residents of D.C. public housing units in lead paint remediation and abatement. Once trained and certified, the District has pledged to hire workers to start on remediating lead from the units. The partnership will help residents interested in forming their own small businesses or link them with existing small businesses. Any companies formed will be eligible for noncompetitive contracts through the HUD Title 3 program. In a closed system, residents are trained, certified, and hired to clean up their communities- own environments to reduce lead exposure and improve environmental quality in their neighborhood. The project could serve as a model for other urban areas with lead problems.
Hazardous Waste Management Technicians. The EPA Superfund Office is funding Cuyahoga Community College in Ohio to train unemployed residents as hazardous waste management technicians. Private industries in the area have agreed to employ trained residents in local cleanup efforts. The Cuyahoga project offers residents the option of working toward Associate of Arts degrees or of enrolling in 4-year degrees at a consortium college.
Xavier University Study. The EPA Office of Small and Disadvantaged Business Utilization (OSDBU) provided $115,000 of Clean Air Funds to Xavier University, a historically black university in New Orleans, Louisiana, to study clean air issues affecting small and disadvantaged businesses in small communities along a corridor with high incidence of cancer. Study results will provide the residents of these communities with a Plan of Action to determine their environmental needs. The OSDBU is evaluating other economic development initiatives to provide minority communities additional opportunities to participate in the environmental marketplace.
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Council of Economic Advisors, Economic Report of the President, (Washington, DC: EOP, CEA, February 1994).
Office of Management and Budget, The Budget for Fiscal Year 1993, (Washington, DC: EOP, OMB, 1993).
Rogich, D.G. and Staff, Division of Mineral Commodities, United States and Global Material Use Patterns, (Washington, DC: U.S. Department of the Interior, Bureau of Mines, September 1993).
Rutledge, G.L. and C.R. Vogan, -Pollution Abatement and Control Expenditures, 1972-92,- Survey of Current Business 36-44 (May 1994).
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